Why more investors are turning to gold
Within the last 50 years, the interest and global trading value of gold have shot up with the introduction of a plethora of vehicles allowing individuals and institutions alike to trade and build positions in gold as part of a portfolio allocation strategy.
In the current market environment, there are three reasons for investors to consider gold as an investment, according to Mike Dragosits, Portfolio Manager, Harvest Portfolios. Firstly, gold is in a Goldilocks environment – not too hot, not too cold – where there’s just enough investor nervousness to generate interest, without selling everything and going to cash.
Another reason is the rising macro and geopolitical tensions – such as the Iran, China-U.S., and Argentina troubles – which are driving gold prices up. The third factor is the easier financial conditions that can be seen around the world – such as lower rates and negative-yielding bonds. Under these conditions, holding gold is becoming much more attractive.
“It’s a hard asset…,” Dragosits says about what makes gold an important portfolio diversifier. “The drivers of gold are very different from cash flows of companies and interest rates on bonds. If you’re holding gold even over the long term, there are different periods where gold outperforms other asset classes.”
Ways to get exposure toward gold include holding bullion directly, gold futures contracts, gold mining shares, and gold ETFs, which can hold a variety of stocks and metal contracts or hold the bullion itself. It means that holding gold equity in an ETF structure can give investors more liquidity as opposed to purchasing physical gold bullion.
Despite these benefits, the uptake of gold has been slow. For Dragosits, it has a lot to do with the environment that the gold space has just come out of – a 7-year bear market in both gold bullion and gold equities. However, from the gold equity side of things, companies have become a lot more efficient through that bear market. As a result, the margins are looking a lot more attractive as gold prices move up, so investors are getting a lot of leverage to the gold price.
“I think that’s setting us up for a much greater opportunity on the gold equity side as opposed to just gold bullion,” Dragosits notes.