This article was first published in the National Post on November 21, 2020. It is being republished with permission.

by Tom Bradley

Gold is back in vogue. The price has risen from US$1,200 two years ago to US$1,900 today. Gold ETFs have grown rapidly, and gold miners have rivalled tech giants for stock market leadership.

I think of gold as a chameleon. It fits Merriam-Webster’s definition perfectly — “a person who often changes his or her beliefs or behavior in order to please others or to succeed.” It can be whatever you want it to be. For people who are passionate about gold, there’s always a reason to own it.

Consider the many and varied roles gold plays in portfolios.

Inflation hedge: Gold is bought as insurance against rising inflation. This feature hasn’t been tested in a long time, but as accommodative monetary policy continues unabated and liquidity abounds, inflation is back in the conversation.

Safe haven: Gold is perceived to be a store of value in times of financial crisis. The CEO of Barrick Gold, Mark Bristow, told the Financial Times recently, “The deep structural damage to the global economy and society at large (from COVID-19) will be with us for a lot longer, it will be like the Second World War crisis … The peak (in gold) will be higher than we’ve seen.”

Currency: Some investors consider gold to be an alternative to the conventional ‘fiat’ currencies, which can be issued in unlimited quantities and aren’t backed by a commodity. Gold doesn’t offer a yield, but the opportunity cost of holding it is now minimal given that T-bill yields in the major currencies are near zero.

Hedge against a weak USD: On the currency theme, gold is considered a good place to hide when the U.S. dollar, the world’s reserve currency, is weakening. This feature is of less interest to Canadian investors, however, because our loonie tends to appreciate in these circumstances.

Cyclical play: According to the World Gold Council, an industry sponsored organization, jewellery and technology make up 42% of annual gold demand. Earlier in my career, analysts talked a lot about the supply and demand, and even casual observers like me knew where mine production was headed and how strong jewellery demand was. Today, this work has been pushed into the shadows by the other 58% of demand.

Sentiment play: I’m referring here to the gold being bought by investors — Central Banks and ETFs. The expansion (or shrinkage) of reserves and ETFs is now a more important influence on the gold price, which makes it a useful tool for assessing where investors are on the fear-vs.-greed spectrum.

Diversifier: The holy grail for investment managers is finding an asset class or strategy that provides a reasonable return and is not correlated to the stock market, which is the biggest single risk factor in most portfolios. Gold fits the bill. It tends to rise when fear is greatest.

Value stocks: Valuations on gold companies are highly dependent on the gold price assumption, which in turn is heavily influenced by the tone of the market. For decades, gold stocks traded at large premiums to their net asset values (NAV), but the higher price for bullion has narrowed the gap. Companies can now be assessed on their ability to generate cash flow and pay dividends although they’re still trading at a premium to NAV and as one analyst put it, “they’re not screamingly cheap.”

A big plus for high-quality gold stocks is their scarcity value. There aren’t many of them.

Heads I win, tails you lose

In the buildup to the U.S. election, Randy Smallwood, chief executive of Wheaton Precious Metals Corp., told the Post that, “any election outcome could trigger gold prices.”

Juan Carlos Artigas, the head of research at the World Gold Council, takes this “heads I win, tails you lose” notion a step further, pointing out that consumer demand is positively linked to the economic cycle while investment flows are countercyclical. Therefore, “gold remains in demand both during times of economic expansion and contraction,” he noted, in a recent sponsored article in the Economist.

This kind of rose-coloured commentary is a reminder to keep some perspective when investing in gold. Gold produces no cash flow on which to assign a value and is driven by investor emotions, which can turn on a dime. When the last precious metal boom went bust, too many investors suffered life-altering carnage because they got caught up in the compelling case for gold.

Nonetheless, gold is a reliable diversifier and may be more useful than ever given negligible yields on bonds. The Gold Council’s recommendation of a 2-10% position in your portfolio is a reasonable one.