John Hathaway, Senior Portfolio Manager, explores why investing in gold makes sense for most investors and how it helps protect portfolios.
John Hathaway: It's amazing. Things haven't changed significantly in terms of the long-term story, which has been in place for 20 years. What's changed is market recognition. Gold went into hibernation for six years after it peaked out in 2011 at $1,900, and since then, it's been basically backing and filling; I would say that it was in a big correction. What's changed is that investors are beginning to realize that there's no way out of easy money. Any attempt that has been made by the Fed [U.S. Federal Reserve] and other central banks to go on a tightening path has been met with a very severe negative reaction in financial markets, particularly in the stock market.
Gold is a Safe Haven Asset
The Yellow Metal was up +18% in 2019
John Hathaway: Gold has always been a safe asset. There's no counterparty risk. I'm not telling viewers anything they don't know. When you think about negative yielding cash in Europe, to me, it's a no-brainer to have some exposure here. Gold has always been a diversifier, a risk diversifier, a risk mitigator. Too many people think of it as a speculative investment. Gold has speculative aspects to it, but at its core, it's the safest asset you can have.
Gold is a Risk Diversifier
It Provides Superior Portfolio Protection
John Hathaway: Gold is a reserve asset that has liquidity seven days a week, 24 hours a day. The bid-ask is very, very narrow. It's extremely safe, extremely liquid, and I would say that in a world of very low yields, or negative nominal yields, and certainly in terms of negative real rates, it astounds me that more people don't gravitate to gold. But this is changing.
Bonds are always thought of as a safe asset. In my mind, they're one of the riskiest assets out there. I don't know what the trigger point is, but at some point, the Fed's attempt to keep a lid on short-term rates is going to run into headwinds.
$Trillions in Negative Yielding Debt
Bonds are Now a Risk Asset
John Hathaway: When that happens, the entire bond asset class is going to be vulnerable to rising rates. Negative nominal yields globally, I think the number is somewhere around $16 trillion. To me, the systemic risk that's represented by that number dwarfs what we saw in 2008 with the toxic mortgages.
The penalty for owning gold versus bonds is very low. If you had a decent free market level of interest rates, it would be a different story. But everything monetary policy is trying to do is suppress interest rates. That is why people are piling into bonds. That's why they are now probably more correlated with equities than they've ever been. Bonds are now a risk asset; they're not the safe asset they used to be.
Gold Allocation of 5% - 10%
Protects Investment Portfolios
John Hathaway: What's left? Basically, gold; it has to fill in for that lack of a safe asset. To me, having some significant allocation to gold like 10% will help protect your bond portfolio from the very real possibility that interest rates in our lifetime will start to rise. When that happens, there's going to be capital destruction that dwarfs what we saw in 2008.
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Past performance is not a guarantee of future results. All data is in U.S. dollars unless otherwise noted. Sprott Gold Equity Fund invests in gold and other precious metals, which involves additional and special risks, such as the possibility for substantial price fluctuations over a short period of time; the market for gold/precious metals is relatively limited; the sources of gold/precious metals are concentrated in countries that have the potential for instability; and the market for gold/precious metals is unregulated. The Fund may also invest in foreign securities, which are subject to special risks including: differences in accounting methods; the value of foreign currencies may decline relative to the U.S. dollar; a foreign government may expropriate the Fund’s assets; and political, social or economic instability in a foreign country in which the Fund invests may cause the value of the Fund’s investments to decline. The Fund is non-diversified, meaning it may concentrate its assets in fewer individual holdings than a diversified fund. Therefore, the Fund is more exposed to individual stock volatility than a diversified fund.
NOT FDIC INSURED • MAY LOSE VALUE • NOT BANK GUARANTEED
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