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Jun 1, 2020

Canadians Well Positioned To Bet On Gold Weakening Loonie Strengthens Price

by Richard Morrison

Richard MorrisonThis is the first time a pandemic has rocked the global economy, which means investments that had outperformed the market before Covid-19 may be laggards over the next few months, while pre-Covid laggards may turn into outperformers. Gold, which has been a miserable investment over the long term, has come alive as investors fear government efforts to revive their economies will trigger inflation.

For centuries, gold has been regarded as a hedge against inflation since it can’t be printed like money and holds its value in the face of fluctuating interest rates. Gold also works well as a diversifier within a portfolio as it has little correlation with other assets, and often rises in times of disaster when everything else is falling. On the downside, gold and other commodities are not buy-and-hold investments like blue-chip, dividend paying stocks you can put in a drawer and forget. Commodities, like gold, have no earnings, pay no dividends and reflect only the current state of supply and demand, resulting in fluctuations that require the investor to be “right” and correctly time purchases and sales. The volatility makes owning gold a fun hobby when the price is rising but much less so when it is moving in the other direction.

At current levels, gold has appeal for momentum investors who hope to buy high and sell higher, although gold should never represent more than five per cent of a diversified portfolio.

The bullion price wavered between U.S.$1,200 and U.S.$1,400 per ounce between 2013 and 2019, except for a dismal 2015, when it fell below U.S.$1,100. Gold stirred to life last summer and in January of this year it climbed past U.S.$1,500. In 2020, gold rose in February, plunged in mid-March and climbed again to near U.S.$1,750 by May 20, a gain of almost 17% on the year. Gold’s see-saw price chart in U.S. dollars appears smoother and more dramatic in Canada, where tumbling oil prices crushed the Canadian dollar. An ounce of gold that was already at a record high $2,000 at the beginning of the year now costs $2,400, up 20%. Charts of the gold price in Canadian dollars at Goldprice.org clearly show the dramatic rise.

The gold price has given a huge lift to Canadian gold mining stocks, although many have suspended production due to fears of exposing their miners to Covid-19. Among the mining companies with the biggest gains since the beginning of this year, Kinross Gold Corp. and Wheaton Precious Metals Corp. were up 67% as of May 20, Barrick Gold Corp. had climbed 61%, Franco-Nevada Corp. was ahead by 54%, Alamos Gold Inc. and Yamana Gold Inc. were each up by 49% and B2Gold Corp. had climbed by 47%.

Here is a brief look at some of the ways to participate in the rally.

Gold Bars And Coins

There is a certain tactile satisfaction in holding a gold bar or coin or giving one as a gift, and if you are a collector who derives pleasure from ownership as much as potential price appreciation, physical gold makes sense. Buying bullion involves commissions and storage fees, however, and unlike owning shares in gold mining companies, there is no potential for gains through earnings or dividends. Then again, bullion is not subject to the political risks that affect gold miners, like local opposition to new mines, high taxes or the Environmental, Social and Governance (ESG) hurdles that corporations must now clear before institutional investors will buy their shares.

Gold coins, bars and certificates are acceptable investments for your Registered Retirement Savings Plans (RRSP), providing they meet certain conditions. To qualify, gold coins must be legal tender, must be produced by the Royal Canadian Mint and must be at least 99.5% pure. Collector coins, defined as coins with a fair market of more than 110% of their gold content, are not acceptable. As well, for gold to qualify as an investment for an RRSP, it must have been purchased from a Canadian bank, trust company, credit union or securities dealer that meets the government’s standards. With Covid-19 temporarily shutting down mints around the world, production has been suspended, making gold coins more difficult to find.

Gold Bullion Exchange-Traded Funds (ETFs)

Gold bullion ETFs allow investors to track the gold price without the fees associated with buying and storing coins and bars. Whether you buy physical gold or units in an ETF that tracks the gold price without hedging against currency fluctuations, you are betting against the Canadian dollar just as much as you are wagering on a gold price increase. As with any U.S. dollar denominated investment, a fall in the Canadian dollar enhances gains, while an increase decreases them. Conversely, a hedged gold ETF offers a way to play gold without betting against the loonie.

Owned mainly as a diversifier against market disasters, bullion funds’ long-term performance records have been universally dismal, with 10-year annualized returns ranging between two per cent and 5 per cent, at least until gold came to life last year.

U.S. Gold Bullion ETFs

The SPDR Gold Trust (GLD), the largest and most recognized gold ETF, was launched in 2004 and now has U.S.$62.59 billion in Assets Under Management (AUM) invested in gold bars held in vaults beneath London, England. GLD carries a 0.4% Management Expense Ratio (MER), regarded as high by U.S. investors. Competitor IShares Gold Trust (IAU) has U.S.$20.2 billion invested in 391.0 tonnes of gold bars and carries what it calls a sponsor fee of 0.25%.

A relatively new U.S. gold fund, the GraniteShares Gold Trust (BAR), launched in 2017, has U.S.$861 million in gold bars and carries a low sponsor fee of 0.1749%.

In response to its low-fee competitors, SPDR launched SPDR Gold MiniShares Trust (GLDM) in 2018 with an MER of 0.18%. The fund has since attracted about U.S.$2-billion in assets.

Canadian Gold Bullion ETFs

Canadian ETFs that hold gold bullion are all RRSP-eligible and have MERs ranging from 0.26% to 0.78%.

Sprott Physical Gold Trust (PHYS.U/PHYS) launched in 2010, had U.S.$2.94 billion in gold held in treasury vaults at the Royal Canadian Mint as of April 30.

iShares has two versions of its Gold Bullion ETF. The hedged version (CGL), launched in 2009, had $696.3 in AUM as of May 20 and carries an MER of 0.55%, while the unhedged version (CGL.C), launched two years later, has $292.0 million in AUM and an MER of 0.56%.

Horizons Gold Fund (HUG), launched in 2009, has $23 million in AUM and an MER of 0.78%. This fund does not hold bullion but tracks the Solactive Gold Front Month MD Rolling Futures Index, an index of gold futures, with U.S. dollar gains or losses hedged to the Canadian dollar.

Three versions of the Purpose Gold Bullion ETF, the hedged version (KILO) a non-FX Hedged version (KILO.B) and a U.S. dollar version (KILO.U) were launched in October 2018 with low management fees of 0.2%. The fund keeps its gold at the Royal Canadian Mint.

Gold Mining Company ETFs

The iShares S&P/TSX Global Gold Index ETF (XGD), launched in 2001, has $1.37 billion in AUM allocated among 37 gold miners. The fund is concentrated, with its top four holdings accounting for almost 60% of its assets. Newmont Corp. represents a full 22% of assets, Barrick Gold Corp. 20%, Franco-Nevada Corp. 11% and Agnico-Eagle Mines Ltd. 6%. A global fund, XGD has about 63% in Canadian names, 26% in companies based in the United States and 10% in South Africa. The fund carries an MER of 0.61% but pays an annual distribution yield of 0.15%.

The BMO Equal Weight Global Gold Index ETF (ZGD), launched in 2012, had $188 million in AUM as of April 30 roughly equally weighted among 28 gold mining companies. Like the iShares fund, this ETF is nominally global but composed mostly of Canadian names, but more diversified because of their equal weighting. The fund carries an MER of 0.61%.

The BMO Junior Gold Index ETF (ZJG), launched in 2010, has just $92.4 million in AUM, with 74% allocated in gold miners from Canada, 10% from the United States, 10% Brazil and 2% Australia. The top three holdings are Canada’s B2Gold Corp. representing 12% of assets, Yamana Gold Inc. 10% and Alamos Gold 7.5%.

Conclusion

Commodity investors must be active traders since, as gold has shown, the long-term trend in price is often sideways or down. Regardless of how well they are managed, all mining, forestry and energy companies are tied to the price of their underlying commodity. Resource sector ETFs that hold a basket of names eliminate company-specific risk, but that’s little consolation when the underlying commodity is down. Just ask those who still hold units in energy-sector ETFs.

The past decade has been a relatively miserable one for those who invested in gold or the companies that mine it. Only since last summer have things turned around. In my opinion, Canadian momentum investors hoping to buy high and sell higher could put a small portion of their assets in a low-fee U.S. dollar denominated bullion ETF like the SPDR Gold MiniShares Trust (GLDM) in case the Covid pandemic returns.

Alternately, you could become a collector and enjoy owning coins for their own sake, and not worry about investment gains or losses. For true collectors, the ability to sell at a profit is a secondary consideration.

Richard Morrison, CIM, is a former editor and investment columnist at the Financial Post. richarddmorrison@yahoo.ca