Investors’ on-off love affair with gold may not be at the seductive levels of the early 1980s or post-financial crisis, but flirtatious glances abound.
The commodity, a historical bolthole for defensive portfolios, is on the move after years of inactivity. The price per ounce broke through the US$1,400 barrier this summer, capitalising on fears around trade, geopolitical tensions and the state of the global economy.
Harvest Portfolios Group launched its Harvest Global Gold Giants Index ETF in January, focusing on the world’s leading large-cap companies. With a management fee of 40 basis points, HGGG tracks the 20 equally weighted positions of the Solactive Global Gold Giants Index TR.
Portfolio manager Mike Dragosits told WP that gold has major tailwinds likely to push the price higher, including the confrontational US-Iran relationship and trade issues, which have impacted global economic data and caused central bankers to turn dovish.
He said: “Talk of rate cuts is something we haven’t seen for quite some time. We are expecting one in the US [later] in July and we are shifting the tone to a lower-rate world – and that’s always been a good world to be in for gold.
“On top of that, you have the ever-present pressure from President Donald Trump to lower interest rates to get a lower US dollar. There is some speculation out there that the US treasury will be shifting their policy to a weaker US dollar and some of the more recent FOMC appointments are on the more dovish spectrum.
“That’s going to shift the tone to a weaker US dollar and that’s always a good environment for gold as well.”
Dragosits added that US rate cuts are baked in already and that investors should be mindful of the Fed’s language going forward, pointing to the real rate of the US 10-year getting close to 0%, which he views as yet another positive for gold.
Although caginess exists among advisors, the commodity remains the safe haven of choice when fear reigns. Dragosits added: “Gold is the most liquid and is always thought of as that safe harbour in these times of uncertainty. I think that will continue, as it has for thousands of years.”
So where does that leave investors and advisors? Is now a good time to increase their exposure? Harvest President and CEO Michael Kovacs told WP he believes it is and that while the “love affair with gold has been out the window for the past seven years”, there appears to be little resistance to it potentially reaching US$1,600 an ounce as interest rates go down.
He said: “That puts quite a lot of pressure on the US dollar to soften up. You have negative rates through every turn, Japan and Europe, and it’s touching the shores of America now.
“You have huge amounts of sovereign debt and there are all kinds of new risk factors that have popped up in the last few years that have made more of an argument to have some portion of your portfolio in gold.
“And even as you talk to advisors, they are still very hesitant to buy any gold product, whether it’s gold bars or more speculative funds, but I think we will see this change as more of these economic cracks start to firm.”
Another driver behind the fund is the activity in the gold industry, a number of mergers shift the emphasis towards a more shareholder-friendly environment of dividends and buybacks. The more prominent players in the space are, in Harvest's view, much slicker operations than they used to be.
Kovacs added: “The idea with our fund is you are buying large-cap, well-run companies with a low cost of production. We’ve also launched this fund at 40 basis points, which is one of the lowest-cost products in Canada for gold ETF.
“We have high hopes for the fund and think it will do well over time, it’s just when that [fear] mentality changes.”
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