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A sprinkling of precious metals in a portfolio can smooth the effects of volatility and improve results for investors, says Onno Rutten, vice-president of investment management at Mackenzie Investments and a portfolio manager on the Mackenzie Resource Team.
He described gold in particular as “portfolio insurance” that typically performs well when other asset classes are underperforming.
“[Our] studies show that if you add 5% to 10% of precious metals exposure into a balanced [60/40] Canadian portfolio, you end up with a better return and lower volatility,” Rutten said.
He allows that investing in good companies in broad equity markets usually offers the best results.
“That’s 95% of the time. But for that 5% of the time, when there’s trouble in the economy or there’s geopolitical trouble or there are unpredictable events, that’s where gold provides that insurance,” he said. “You will end up likely with a smoother ride and a slightly better return profile.”
He splits the precious metal category into three investment camps: physical (gold bullion), precious-metal ETFs, and precious metal equities like gold miners.
“The attraction of the physical is it has a lot lower volatility. And it’s less exposed to the vagaries of the equity markets,” he said.
He suggested 2022 offered a perfect example of this dynamic.
“Gold was up 7% in Canadian dollars but the gold mining equity index was down 2%,” he said. “So here you had a situation where the gold miners had to deal with inflation on the cost base and, therefore, they underperformed bullion.”
Metals as a hedge against inflation
Rutten said precious metals, particularly gold, have done “remarkably well” as a hedge against the recent bout of inflation.
“Gold went up 7% in Canadian dollars in 2022 when the S&P 500 was down 12%, and when a broad bond portfolio was also down 12%,” he said “So, you can see that gold still acts as that anti-correlated, anti-market asset.”
Furthermore, with the advent of persistent inflation and negative real rates on bonds, gold should do well in the coming months.
“Historically, gold appreciates by 14% per year when real rates are negative,” he said. “I think that window will open later this year or next year.”
The gold standard
Rutten also pointed out that in an era where currency is being created at tremendous speed — either in a printing press or a crypto mine — the world needs gold more than ever to back its portfolios.
He said questions about gold’s usefulness as a currency or as a standard within the modern economic system are misguided.
“I actually think there might even be more of a reason to think about gold in this modern society,” he said, “because it’s just too easy to create money out of thin air these days.”
During the pandemic, he said, central banks printed $10 trillion of currency in the space of six months — at a time when societies were not productive. And the creation of crypto currencies has been accelerating with concerning speed.
“You create currencies at the push of a button. And then, as we’ve seen over the past few weeks, you destroy them at the stroke of a pen, by the regulator,” he said. “So, I think there is actually very much a need for some anchor, some currency, that cannot just be created out of thin air.”
He said gold has had thousands of years of history as a trading standard and is not easily created or destroyed. Furthermore, it cannot be hacked.
Central banks around the world are also looking to gold to ease concerns about geopolitical risks to their treasuries, he said. Last year was the biggest ever for sovereign purchases of gold bullion.
“China, Kazakhstan, Turkey, and Uzbekistan, countries like that, that feel a bit exposed in the global system, are actually increasing their holdings of gold bullion,” he said. “They want some anchor in their portfolios.”
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This article is part of the Soundbites program, sponsored by Canada Life. The article was written without sponsor input.