Gold Moves Up - But Will It Continue To?

Last update on July 1, 2019.

Image Credit: photo BC / Shutterstock.com

At the beginning of every month, I brief members on how MoneyGeek's Regular portfolios have performed and comment on the state of the financial markets. In this update, I’ll also share my thoughts on gold.

 

June Performance of Regular Portfolios

The performance of MoneyGeek's Regular portfolios for the month of June 2019 were as follows:

 

Last Month

Last 12 Months

Since Apr 2013

Aggressive

+3.4%

-5.5%

+90.2%

Growth

+3.0%

-4.2%

+76.0%

Balanced

+2.6%

-3.2%

+62.2%

Conservative

+2.2%

-2.2%

+49.1%

Very Conservative

+1.8%

-1.0%

+36.9%

I've chosen to list below the performance of some of our competitors. For the sake of brevity, I've decided to show only those portfolios that have a similar risk profile to MoneyGeek's Regular Aggressive portfolio.

 

Last Month

Last 12 Months

Since Apr 2013

RBC Select Aggressive Growth

+2.5%

-0.7%

+40.6%

TD Comfort Aggressive Growth

+2.3%

-7.0%

+36.9%

CIBC Managed Aggressive Growth

+2.4%

+1.0%

+52.7%

Canadian Couch Potato Aggressive

+2.5%

+6.7%

N/A

 

In contrast with our competitors, MoneyGeek’s Regular portfolios employ stocks/ETFs that follow the value investing strategy (QVAL, IVAL and BRK-B), and also allocate a larger percentage of the portfolios toward Canadian oil and gas stocks (XEG.TO) and gold (CGL-C.TO). If you would like to take a look at our portfolios, I invite you to sign up for our free membership.

The Regular portfolios outperformed its competitors in June. QVAL went up by 6.1% during the month, beating the US stock market average which went up by 4.0%. Gold prices lent a helping hand as well, going up by 4.3%.

Gold made headlines among financial publications for the first time in many years. After the 2009 to 2013 period in which some investors made overly optimistic predictions, the price of gold had stayed stuck in a range between $1,100 and $1,300 an ounce. Last month, however, gold broke out of that range, causing some investors to ask why.

 

Source: https://goldprice.org/gold-price-history.html

 

Different sets of factors drive gold’s long term and short term price movements. Of these, the long term movement is easier to understand, since it’s mainly driven by inflation. 

A piece of gold, once purchased, neither changes in size or quality. This is different from owning stock in a company, which has the potential to grow significantly. The price of gold could still increase significantly if demand for it continues to increase exponentially and/or supply decreases continuously. However, neither has been the case historically, and I fail to see how it would be different in the future. So barring any fundamental changes, gold prices will track inflation in the long term.

The short term movement of gold, however, is trickier to understand. As I see it, there are two factors that drive gold prices, and they are flight to safety and low interest rates, which often go hand in hand.

Historically speaking, gold enjoyed bumps up in prices when the world seemed close to a major war or a recession. People view gold as the ultimate store of value, and as a universal currency. This property of gold hit home for me when I read an anecdote of two commodity traders discussing what they’d prefer to own should world war 3 erupt. 

The first trader asserted that he’d want to own oil. Waging a war is very energy intensive as tanks and airplanes guzzle oil, while the supply of oil may see disruptions. The second trader, however, said he’d rather own gold. The only reason the second trader was alive was because his grandparents escaped Nazi Germany by bribing soldiers with gold.

Now, it’s hard for me to imagine the world descending into such chaos that I’d want to own physical gold to escape calamity. But some people do view the world through rather cynical lenses, and increasing talks of wars and recessions can stoke their cynicism. It would also be wrong of us to dismiss all pessimists’ concerns out of hand. After all, no one knows the future, and most people were equally bewildered when the first world war erupted the way it did.

The other short term factor that can push gold prices up is the prevalence of low interest rates. Sometimes, interest rates could be so low that investors become disinterested in putting money into bonds. Instead, they look for something - anything - that would generate better returns. Money tends to flow towards high risk, potentially high reward investments in such circumstances. In the past few years, the destination of this money were growth stocks (e.g. Uber) and cryptocurrencies. But gold also has the potential to be a similar destination, as was the case in 2012.

Since interest rates tend to come down during recessions, you could argue that the two short term factors driving gold prices are linked. It therefore stands to reason that gold would do well if the world does slip into a recession soon, and vice versa.

While no one knows for sure whether we’ll have a recession or not, most thoughtful investors would agree that the chance of having one seems high. That’s why I still choose to keep gold in MoneyGeek’s Regular portfolios, to act as a hedge in case stocks in the portfolios go down.

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