Transcript: Precious metals in your portfolio offer stability and better returns

Onno Rutten (OR): I would actually argue that the current environment calls for a bit more of an anchor, because it’s too easy to create money out of thin air these days. During the pandemic, let’s take an example, the central banks printed $10 trillion while the world economy was not productive. Then, think about crypto currencies. We create currencies with the push of a button, and we destroy them by the stroke of a pen by the regulator. So, I think there is actually very much a need for some anchor, some currency, that cannot just be created out of thin air. I actually think there might even be more of a reason to think about gold in this modern society. And the central banks seem to agree. They like also some anchor in their portfolios.

Metals as a hedge against inflation.

OR: Yes, people, especially in 2022, started wondering whether gold still serves its function as an inflation hedge. 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%. So, you can see that gold still acts as that anti-correlated, anti-market asset. The long-term market expectations for inflation are 2.2%. The market still thinks that inflation will be brought under control. I think the moment for gold to shine will be when the market starts realizing that that target is not within reach. And I think we’re going to get stuck in a world with 3%, 4%, 5% inflation, because there’s big structural drivers of inflation. And there might be a very interesting window for gold in the next year. Historically, gold appreciates by 14% per year when real rates are negative. I think that window will open later this year or next year.

Best investment mix for optimal return.

OR: I’m happy that you ask about the best returns, because that’s what we’re after here in the end, but as a trade-off with volatility. The attraction of the physical — so think gold bullion — is it has a lot lower volatility and it’s less exposed to the vagaries of the equity markets. So, 2022 is a perfect example, where gold was up 7% [in] Canadian dollars but the gold mining index, — the equity index — was down 2%. So, we always argue for the  balance between bullion — its physical exposure — and equity exposure. On precious metals equities, investors can buy ETFs — so, there’s gold index ETFs — or they can buy a precious metals fund, which is 90% equities, 10% bullion, typically, there. It’s simply a question of performance.

And finally, why precious metals are a valuable part of a balanced portfolio.

OR: We’ve done extensive studies where we take a typical Canadian investor portfolio — a balanced portfolio, 60:40 equities:bonds, Canadian perspective – and then we introduce gold bullion or gold equities to that portfolio and see how the portfolio changes its characteristics over time. And over and over again, these studies show that if you add 5% to 10% of precious metals exposure into a balanced Canadian portfolio, you end up with a better return and lower volatility. And that’s because gold is portfolio insurance. It performs typically well when other classes do not perform well. So, it offers that offset. And 5% to 10% seems to be the optimum. Over time at 5% to 10% of your financial liquid assets invested in precious metals, you will end up likely with a smoother ride and a slightly better return profile.

Well, those are today’s Soundbites, brought you by Investment Executive and powered by Canada Life. Our thanks again to Onno Rutten of Mackenzie Investments.

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