Lining your portfolio with gold
Gold may be rising in value, but it’s still undervalued on the stock market, says this Canadian expert, who recommends nine stocks.
“If ifs and buts were candy and nuts, we’d all have a very Merry Christmas.”
There’s not usually much to be gained in raking over what might have been. Still, from time to time there is an “if” that puts things in perspective. For instance, what if you had invested in gold forty years ago?
You would have had better returns than all the major stock indexes. Your investment would have grown faster than the U.S. national debt and the pace of inflation.
In U.S. dollars, your investment would have increased in value by 3,000 per cent!
All of these juicy “would-haves” come to us from Mr. David Chapman, who is concerned that investors don’t have enough gold in their portfolios.
And as the price of gold keeps pushing through new roofs almost daily, he may have a point.
Writing in Investor's Digest of Canada, Mr. Chapman gives us his perspective on the progress of gold.
But first, we’ll get a head start on selecting some gold for one’s portfolio. Mr. Chapman has one list of stocks for conservative and another for the not so conservative.
Could rise faster
Holding gold stocks isn’t the only way to own gold, of course. You can buy bullion directly or invest in a fund that holds gold, silver and platinum for you. Mr. Chapman is a director of the BMG BullionFund. You can also buy one of the exchange-traded funds that track the price of gold.
“The most leveraged way to hold gold,” this analyst says, “is to own the stocks of companies that produce it. As the price of gold rises, the share prices of companies that produce gold could rise faster.”
For starters there are the “five premier Canadian gold producers,” all of which pay dividends (albeit at low yields).
The big five are: Barrick Gold (TSX-ABX), Goldcorp (TSX-G), Kinross Gold (TSX-K), Agnico-Eagle Mines (TSX-AEM) and Yamana Gold (TSX-YRI).
For those willing to take on riskier propositions, Mr. Chapman sticks to established producers — not high-risk juniors, but mid-tier companies with respectable market caps. They are: Eldorado Gold (TSX-ELD) at a market cap of $4.5 billion, Red Back Mining (TSX-RBI) at $3.2 billion, Gammon Gold (TSX-GAM) at $1.1 billion, and for a silver lining in the portfolio, Pan-American Silver (TSX-PAA) at $2 billion.
The respect it deserves
Gold remains under allocated in most portfolios, Mr. Chapman insists. What’s more, the value of gold stocks is under allocated on the stock market.
The total value of all the securities in the world — stocks, bonds and so on — is about $180 trillion in U.S. dollars. The total value of all the gold in the world is $4 trillion. The market cap of all the gold mining companies in the world is around $250 billion.
The world’s largest company by market cap, Exxon Mobil (NYSE-XOM), at US$353 billion, dwarfs the gold mining community. The largest among them is Barrick, at US$43 billion.
In short, the market still doesn’t give gold the respect it apparently deserves, if today’s prices are anything to go by.
The gold standard
The value of gold may fluctuate, Mr. Chapman tells us, but it has never lost its value. Gold was the world’s prime currency for many years, starting as early as 700 B.C.
The so-called gold standard was not introduced until paper currency came into general use. That was in the ninth century in China and the 17th century in Europe. Paper money could be exchanged for gold. In effect, gold made paper money respectable and reliable.
Thereafter, nations only abandoned the gold standard when they had to print large amounts of money, usually for wars — the Napoleonic Wars, the U.S. Civil War and World War I, to name three.
During the Great Depression and World War II, the gold standard was under constant pressure. And in 1944, the British pound sterling ceased to be the world’s reserve currency and the U.S. dollar took over, convertible into gold at $35 an ounce.
In August 1971, Vietnam, the cause of so much turmoil, was also the last straw for the gold standard. In order to finance that war, the Nixon administration cut itself loose from the gold standard once and for all.
Top performing assets
Since then, Mr. Chapman tells us, gold and the U.S. dollar have gone in opposite directions. The purchasing power of the dollar has fallen by 80 per cent. Gold, as we have seen, has appreciated by 3,000 per cent.
By contrast, the Dow Jones Average has risen only 1,200 per cent since August 1971. GDP has increased 1,250 per cent and debt by 1,970 per cent.
Gold’s all-time low price, taking inflation into account, was US$200 in 1971, right when the gold standard ended. Its highest price, also adjusted for inflation, was close to US$2,300 in 1980.
Tracking its progress since it was freed from paper money, it appears that gold is breaking out of a 300-year down trend, the analyst tells his readers in Investor's Digest of Canada.
“It has over this past decade been one of the top performing assets. And since the end of the gold standard in 1971, it has not only outstripped inflation, but has also topped almost every other asset class.”
Thus far today, the price of gold has risen by $19.80.
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