The gold strategy for uncertain times

Why an alternative to owning bullion can deliver even bigger for investors

The gold strategy for uncertain times

Gold never totally goes away. Certain assets take the spotlight, capture investor interest, and play consistent roles in portfolios but behind all that, gold is there. In uncertain times, especially, gold plays its most important role, a source of ballast and stability where other assets flag and flounder. We’ve seen that play out so publicly in past weeks when even the U.S. dollar has dropped while gold rises.

Tuesday, though, saw sharp drops in the price of gold, falling below $2,000 again. This is on the back, according to some analysts, of news of a Russian approved COVID Vaccine, which the global scientific community and some Russian watchdogs have said has been too fast to be safe, as well as news of Democrats and Republicans inching closer to a stimulus package. These developments seem to have increased risk appetites as investors moved away from gold, at least for the short term.

In an uncertain world where news from a research institute in Moscow can shift a commodity price like Gold, one fund provider says there’s a better, even more stable, means of getting gold exposure without necessarily opening investors to the risks of volatile commodity price swings: gold equity ETFs.

Harvest Portfolios President and CEO Michael Kovacs told WP that his gold giants ETF (HGGG) is designed to offer investors exposure to gold through direct exposure to the best established companies in the gold industry. The fund indexes companies like Barrick Gold, Newcrest, Yamana and other leaders that collectively produce more than 30 million ounces of gold a year. Kovacs says, too, that the portfolio has a production price of less than $800 an ounce with some companies as low as $600 an ounce. These are companies with “extreme profitability” that are designed to profit when gold prices are low and profit hugely when they are high. Kovacs says that while gold remains an attractive hedge for a portfolio, these gold companies with solid track records should be seen an attractive alternative.

“We're seeing an unprecedented amount of public debt being racked up,” Kovacs says. “At some point, that debt is going to rear its head down the road, that's going to lead to further fiat currency devaluation and possible inflationary pressures that haven’t yet materialized at this point. Those pressures, I think,are a very positive reason to hold gold or gold equities.”

Profitability for those companies, though, is dependent on continued production at profitable scales. While it seems the dramatic spread of COVID-19 in major mining countries like South Africa could impact the profitability of miners operating there, forced to implement social distancing inside mines, Kovacs says we haven’t yet seen the virus materially impacting production for these miners beyond a few short-term dips in production. Spikes in gold prices have made up the profit gap from any shorter-term production drops.

Overall, HGGG has been firing on all cylinders. Kovacs says it has averaged returns about double that of straight gold bullion. Since its inception 19 months ago, the fund is up just below 100 per cent.

“It’s one of the top performers in the gold ETF space right now,” he says.

Kovacs says that the focus on large cap, profitable gold producers that has delivered for the past 19 months should continue to work in future. He sees the present reality of huge debt loads and zero interest rates continuing for a long time to come.

“In that scenario, gold is now competing with a zero interest rate and I think that should bode well for these companies.” Kovacs says. “They should continue to perform well in this late economic cycle…What we said when we launched this product, and what we’re seeing now, is a five to ten per cent position in gold or a gold fund is prudent. I think it’s really important that people looking at retirement especially consider a position in gold or a gold ETF.”