For the first episode of our new podcast Sprott's Ed Coyne discusses how gold can function as a non-correlated alternative asset within an investment portfolio.
Ed Coyne: Welcome to Season 1, Episode #1 of Sprott Gold Talk. I am Ed Coyne, and I'll be your host today talking about precious metals, specifically physical gold. People often think about physical gold as a non-productive asset. Today, we will talk about how to make physical gold a productive asset within a diversified portfolio. For those who aren't familiar with Sprott, I will explain who we are as a firm and then pivot right into today's topic, physical gold.
Sprott is a unique firm in that we focus primarily on precious metals, whether it's the physical market, the equity market or the lending market.
As I mentioned, gold can be approached in several ways from an investment standpoint, whether it's the physical market, equities on the small-cap/junior mining side or the large-cap/senior mining side, or even raising capital and loaning it to mining companies for operating leverage. There are many ways to invest in this space, but first, I will focus on why simply allocating the physical gold market is essential.
Ed Coyne: Investors often think about physical gold as just a yellow rock on a shelf and nothing more. They don't see it as a productive investment asset. Gold bullion doesn't pay a dividend. There are no earnings, no income, no management. Gold just sits there.
One of the most famous investors out there, Warren Buffett, notoriously talks down gold in his annual shareholder letters and sometimes for good reason. What does gold do?
Unlike an asset that you can technically "set and forget" ― like a stock of a company that pays a dividend and has earnings and so forth ― gold is different in that you have to manage that allocation to make it a productive asset.
Ed Coyne: If you look at gold's performance over the last four-plus decades, gold has served as one of the better diversifiers in a portfolio. Gold is liquid, it's low cost, and it has produced quite nice returns for investors, particularly when you're looking at gold relative to other assets. Over the past 20 years, in what I call the "modern era of gold investing," it has been one of the best performing assets out there.
Figure 1. Gold vs. Stocks, Bonds and USD
Returns for Period from 12/31/1999-12/31/2020
Source: Bloomberg. Period from 12/31/1999-12/31/2020. Gold is measured by GOLDS Comdty: S&P 500 TR is measured by the SPX; US Agg Bond Index is measured by the Bloomberg Barclays US Agg Total Return Value Unhedged USD (LBUSTRUU Index); and the U.S. Dollar is measured by DXY Curncy. You cannot invest directly in an index. Past performance is no guarantee of future results.
Ed Coyne: But the reason for owning gold is really what people need to think about as investors. If you get caught up on the idea that gold doesn't pay a dividend, if you get caught up on the idea that there are no earnings, if you try to compare gold to a typical large-cap company in the S&P 500 Index, you will typically not invest in gold because you are comparing an apple to an orange. But suppose you think about gold not as a commodity but as a true alternative asset. In that case, the potential opportunities start to widen on how to think about gold in a portfolio.
We like to say at Sprott that "gold is the original alternative investment." And what we mean by that is when you look at gold over the last four-plus decades, since it has been able to trade freely in the open market in the U.S., gold has a history of performing differently than stocks and bonds over multiple market cycles.
Ed Coyne: 2020 was just another reminder of gold's ability to provide diversification within a portfolio. We have been seeing this positive shift since the fourth quarter of 2015, when the Federal Reserve attempted to tighten interest rates. Before that, during the Global Financial Crisis of 2008, gold, yet again, served as a wonderful diversifier. When you look at gold over the last 20 years, gold's been a fantastic diversifier in a portfolio and delivered notable returns.
Now, how do you make an asset like gold that simply sits on a shelf productive? How do you put it to work?
You have to manage that allocation. For example, suppose you decide that you will have a 3-5-10% allocation to the physical market as a diversifier in your portfolio. In that case, you have to be mindful of that weight and rebalance it over time. Whether that's every quarter or on an annual basis, depending on the investment account's tax sensitivity, you have to review the portfolio. Last year, gold outperformed the S&P 500 Index, so you would consider trimming back your gold allocation to the desired weight. If you are targeting a 5% gold allocation and it grows to 6%, you would trim that position. Conversely, in years where the S&P 500 Index has outperformed gold, and your 5% gold allocation shrinks to 4%, you would think about adding to your gold allocation to build it back to 5%.
Ed Coyne: Over multiple market cycles, if you manage your physical gold allocation, you are taking a "non-productive asset" and making it productive. You would typically sell gold when it is working and you buy gold when it's selling off relative to the rest of your portfolio, not in absolute terms, but in relative terms. That is the way to make physical gold a productive asset in a portfolio. You'll find over time when you do that gold will be one of your better-performing assets as a diversifier.
Before you go down the path of a "2 and 20" or a "1 and 10" alternative asset strategy through a hedge fund and invest in a product that in some cases is very hard to understand and very hard to articulate to your shareholder base, think about gold as a straightforward, simple, low cost, liquid way to get a portion of your capital outside the traditional markets and into a different part of the market that has a history of performing differently.
I just wanted to get a message out there that physical gold is a true alternative for today's podcast. Physical gold can be a productive asset if you put it to work. For those that want to be more opportunistic, you can always look at the gold equity story. There are certainly times when you want to own gold stocks, and there are times when you don't.
Ed Coyne: We believe that we're in a phase of the market today where you want to own both gold bullion and gold equities because of the overall narrative in the marketplace. We all know we are going to be in an environment of lower-for-longer interest rates. We all see that money is being printed daily, which is very supportive of gold.
We encourage you to tune in to our next episode to hear more about gold mining equities. Thank you for listening.
Past performance is no guarantee of future results. You cannot invest directly in an index. Investments, commentary and statements are unique and may not be reflective of investments and commentary in other strategies managed by Sprott Asset Management USA, Inc., Sprott Asset Management LP, Sprott Inc., or any other Sprott entity or affiliate. Opinions expressed in this commentary are those of the presenter and may vary widely from opinions of other Sprott affiliated Portfolio Managers or investment professionals.
This content may not be reproduced in any form, or referred to in any other publication, without acknowledgment that it was produced by Sprott Asset Management LP and a reference to sprott.com. The opinions, estimates and projections (“information”) contained within this content are solely those of Sprott Asset Management LP (“SAM LP”) and are subject to change without notice. SAM LP makes every effort to ensure that the information has been derived from sources believed to be reliable and accurate. However, SAM LP assumes no responsibility for any losses or damages, whether direct or indirect, which arise out of the use of this information. SAM LP is not under any obligation to update or keep current the information contained herein. The information should not be regarded by recipients as a substitute for the exercise of their own judgment. Please contact your own personal advisor on your particular circumstances. Views expressed regarding a particular company, security, industry or market sector should not be considered an indication of trading intent of any investment funds managed by Sprott Asset Management LP. These views are not to be considered as investment advice nor should they be considered a recommendation to buy or sell. SAM LP and/or its affiliates may collectively beneficially own/control 1% or more of any class of the equity securities of the issuers mentioned in this report. SAM LP and/or its affiliates may hold short position in any class of the equity securities of the issuers mentioned in this report. During the preceding 12 months, SAM LP and/or its affiliates may have received remuneration other than normal course investment advisory or trade execution services from the issuers mentioned in this report.
SAM LP is the investment manager to the Sprott Physical Bullion Trusts (the “Trusts”). Important information about the Trusts, including the investment objectives and strategies, purchase options, applicable management fees, and expenses, is contained in the prospectus. Please read the document carefully before investing. Investment funds are not guaranteed, their values change frequently and past performance may not be repeated. This communication does not constitute an offer to sell or solicitation to purchase securities of the Trusts.
The risks associated with investing in a Trust depend on the securities and assets in which the Trust invests, based upon the Trust’s particular objectives. There is no assurance that any Trust will achieve its investment objective, and its net asset value, yield and investment return will fluctuate from time to time with market conditions. There is no guarantee that the full amount of your original investment in a Trust will be returned to you. The Trusts are not insured by the Canada Deposit Insurance Corporation or any other government deposit insurer. Please read a Trust’s prospectus before investing.
The information contained herein does not constitute an offer or solicitation to anyone in the United States or in any other jurisdiction in which such an offer or solicitation is not authorized or to any person to whom it is unlawful to make such an offer or solicitation. Prospective investors who are not resident in Canada or the United States should contact their financial advisor to determine whether securities of the Funds may be lawfully sold in their jurisdiction.
The information provided is general in nature and is provided with the understanding that it may not be relied upon as, nor considered to be, the rendering or tax, legal, accounting or professional advice. Readers should consult with their own accountants and/or lawyers for advice on their specific circumstances before taking any action.
© 2021 Sprott Inc. All rights reserved.
You are now leaving Sprott.com and entering a linked website. Sprott has partnered with ALPS in offering Sprott ETFs. For fact sheets, marketing materials, prospectuses, performance, expense information and other details about the ETFs, you will be directed to the ALPS/Sprott website at SprottETFs.com.Continue to Sprott Exchange Traded Funds
You are now leaving Sprott.com and entering a linked website. Sprott Asset Management is a sub-advisor for several mutual funds on behalf of Ninepoint Partners. For details on these funds, you will be directed to the Ninepoint Partners website at ninepoint.com.Continue to Ninepoint Partners
You are now leaving sprott.com and linking to a third-party website. Sprott assumes no liability for the content of this linked site and the material it presents, including without limitation, the accuracy, subject matter, quality or timeliness of the content. The fact that this link has been provided does not constitute an endorsement, authorization, sponsorship by or affiliation with Sprott with respect to the linked site or the material.Continue