By Tom Bradley

I’ll never forget an interview I did with Michael Hainsworth on BNN. It was almost exactly two years ago. Michael started the interview very directly, “Tell me, why no gold?” After I explained why our managers didn’t own any gold stocks, he then asked, “And no interest in base metals?” When I said we had no mining stocks in our funds, Michael was beside himself. “Do you at least own some energy stocks?”

When I walked out of the studio on to Burrard Street, I felt like I’d been hit by a truck. Were our clients’ portfolios really that off base?

I tell this story because it captures the investor sentiment of the time. In 2010/11, if you didn’t own gold, copper and other commodities that were part of a China-driven ‘super cycle’, you were branded a contrarian (as I was that day). It stands in stark contrast to where we are today, and perhaps explains why the downdraft in gold and gold stocks is occurring.

Despite all the headlines and hyperbole, investors shouldn’t find the swing in gold to be particularly remarkable. I say that for a few reasons:

  • Gold went from $400 to $1,900 over 6 years (2005-2011). That’s a stupendous run and it may just have been time for a breather.
  • There were lots of violent price moves over the course of those years, mostly to the upside. Commodities, stocks and other assets (including houses) that experience big price increases should be expected to also experience big downswings from time to time.
  • The investors who want to own gold have had lots of time to get in, which makes it less likely that there will be a big surge of unexpected or untapped demand.
  • While the price more than quadrupled, there was no change to gold’s ability to generate income. In 2005, a Troy ounce produced no cash flow or dividends. Today, it produces no cash flow or dividends.

Is the bull market over for gold? I have no idea. Amongst the myriad of factors that impact the gold price, I haven’t been able to sort out what drives it. It’s just not as simple as inflation or financial crises.

Is gold no longer a safe haven? It never was (at least, you never read that it was in this space). As a stand-alone investment, gold is highly speculative. It has no income stream to value, so it’s driven by market sentiment. In the context of a balanced portfolio, however, a modest position in gold is a good diversifier. It reacts to different factors and tends to lead and lag at different times. For instance, while the stock markets have been rolling over the last year, gold has been trending down.

Am I surprised by the swing to a negative sentiment towards gold? Given my comments above, I shouldn’t be, but I’ll admit, it has been a remarkable turnaround, especially given how strong views were just two years ago. It’s still rattling around in my head - THIS MAN DOESN’T OWN ANY GOLD!!!

(Note: We currently own two gold mining stocks – Franco Nevada in the Equity Fund and Primero Mining in the Small-Cap Equity Fund.)