By Harvest Portfolios Group
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Mike Dragosits, CFAPortfolio Manager |
As government spending balloons and near-zero interest rates create inflationary bubbles for assets like real estate, investors have been looking for ways to protect themselves from the uncertainty.
Gold is one traditional way, but with a third of 2021 in the history books, gold stocks have lagged the TSX average. The TSX Composite Index is up 12% year-to date while the TSX Global Gold Index is up 5.6%. [1]
Mike Dragosits, portfolio manager at Harvest Portfolios Group Ltd. in Oakville, Ont. says the situation illustrates why trying to time movements in gold prices is difficult and why investors should consider a gold holding as a portfolio anchor.
“It’s always difficult to time the market, which is why there’s always a case to have gold in a portfolio as a diversifier,” Mr. Dragosits says.
He says gold has lagged in part because investors have turned to cryptocurrencies. But the volatility of those options is now sending some back into gold funds.
“Gold has been the forgotten asset this year as attention turned to crypto currencies and the gold-like qualities of that market,” Mr. Dragosits says. “But these currencies are new and untested and are difficult for a lot of people to understand. So you’re seeing a rotation back into gold.”
Harvest launched the Harvest Global Gold Giants Index ETF (TSX:HGGG) in January, 2019 to take advantage of gold’s potential. The ETF is an equally weighted portfolio of 20 of the world’s largest gold companies and tracks the Solactive Gold Giants Index. Three-quarters of the companies are based in Canada, although they have global operations. The ETF is passively managed and rebalanced quarterly.
Mr. Dragosits said gold’s weak performance in the first quarter was in part due to a belief that the pandemic’s impact would end quickly leaded to a quick economic normalization.
“Everyone got super excited about the reopening of economies, but the coronavirus is still with us and there’s still a lot of uncertainty. Not every country is heading down the same path.”
While the U.S. Federal Reserve signaled the possibility of interest rate increases in the new year that message has changed. Bond yields have stopped rising and expectations of inflation have picked up. The U.S. dollar has weakened and gold is moving higher.
Commodity prices in general are rising as demand has picked up with the reopening of economies. Bottlenecks in supply chains have added to price pressures. These factors also favour gold.
Mr. Dragosits said the pandemic’s impact on supply and demand for goods was initially hard to estimate. For many industries, demand fell quickly, leading to production shutdowns and then ramped up quickly leading to bottlenecks. The bottlenecks now have to work through the system.
At the same time, government stimulus flooded the global economy leading to inflation worries.
“That’s another reason to own gold,” Mr. Dragosits says. “Gold protects you from worries like that.
He noted that the producers in the Harvest Global Gold Giants Index ETF have attractive valuations and offer good leverage as prices rise.
Mr. Dragosits says the risk for gold is that the global economy reopens and normalizes quickly resulting in rising interest rates. He believes there are enough concerns about sovereign debt, new rounds of economic stimulus and inflation that investors will be worried about wealth preservation.
“A basket of gold stocks is a good way to access the benefits of gold. Especially companies that produce gold. At these price levels they are very profitable, so any increase in the price goes to their bottom line.”
For more on Harvest ETFs click here.
[1] May 25, 2021
