Is gold right for your portfolio?
Turbulent times in the markets and economy have helped make gold a hot commodity. Since 2007, the price of gold bullion coins and bars has staged a strong rise that has seen it edge above the US$1,000 mark. And there are signs that gold may show further strength in the short term.
Whatever direction the gold price takes, having some exposure to this precious metal can provide important diversification benefits for your portfolio.
What’s behind the recent strength
Gold’s rise has been supported by a number of factors. One of the main factors has to do with supply and demand.
On the supply side, gold production on a global basis is slowing or declining, with older mines becoming depleted. While new mine projects are planned, these can take years to bring into production. And obstacles such as growing concerns over the environmental effects of gold operations may slow development further.
On the demand side, there is constant and potentially growing demand from the jewelry industry. The main drivers are China and India, which generate a demand surge each year for their wedding seasons. Increasing affluence in China and India should help keep demand for gold buoyant in the coming years.
Gold and the greenback
Another support for gold has been recent weakness in the U.S. dollar.
Investors are concerned that huge U.S. government deficits could last for many years and help bring down the value of the greenback. Indeed, Scotia Economics sees the U.S. dollar falling to par with the Canadian dollar by late 2010.
Gold is denominated in U.S. dollars and traditionally rises when the dollar falls, so further weakness in the currency could help support the price of gold.
What this means for your portfolio
For investors, having some exposure to gold can provide important diversification benefits. For instance, gold’s role as a store of value can help offset the risks of holding U.S.-dollar-based assets in your portfolio, and can provide protection in the event of further market volatility. While economic conditions may continue to improve in the coming months, any significant disappointments going forward could lend support to the gold price.
With a wealth of Canadian-based gold companies on the S&P/TSX index, gold mining shares and gold funds provide ready exposure to the sector.
A number of gold Exchange-Traded Funds (ETFs) on the Canadian and U.S. markets also provide a convenient and cost-effective way to hold gold bullion and gold equities.
Finally, it’s important to note the downside risks of gold. Some predict that a steady improvement in the global economy and the financial markets, helped by timely actions by the U.S. Federal Reserve, could remove gold’s “safe haven” appeal. A rebound in the U.S. dollar could also weaken gold prices.
Remember, as well, that gold has been volatile recently, and may not be suitable for conservative investors.
Most experts suggest limiting gold to 5% to 10% of your overall portfolio.
What’s right for you will depend on your investment objectives and risk tolerance. We can help you decide on the role that gold can play in your diversified portfolio and the best way to invest in the sector.