The price of gold has rallied this year from US$1,517 an ounce at the start of the year to US$1,975 as of July 31. What was the driver behind this recent surge? The COVID-19 pandemic and lockdowns have caused the steepest drop in gross domestic product (GDP) in modern history. In response, central banks around the world rushed to expand their balance sheets and backstop financial markets, while central governments unleashed record amounts of fiscal stimulus. This action has led to a sharp increase in public debt levels and a drop in real interest rates, making gold, historically considered an effective inflation hedge, an attractive investment. As a result, investors increased their allocations to gold and gold company stocks, supporting prices. When the pandemic hit, we were early adopters of gold and gold stocks, introducing both to our portfolios in the first half of the year. The knee-jerk reaction is to assume that most of the rally is behind us, with gold up over 25% this year. But an inspection of the secular trends in GDP growth, interest rates and central bank balance sheets lead us to a different conclusion.
Let’s start with the secular decline in GDP growth. Since the 1980s, the average GDP growth rate for G7 nations has slowed in each subsequent decade. More recently, COVID-19 has reduced economic activity so much that it will likely take years to return to pre-pandemic levels. Given the economic downturn and the continuing high global demand by investors for yield-bearing investments, we would expect interest rates to remain low for some time.
What about central bank balance sheets, which have been rising almost in lockstep with gold? Central banks around the world remain committed to low interest rates and asset purchases. These are needed to support faltering economies as well as the massive fiscal stimulus and public debt levels. In summary, the secular forces behind the increase in gold prices, namely a decline in long-run GDP growth and real interest rates, along with larger central bank balance sheets, are likely to support gold prices for the foreseeable future.
In the shorter term, gold prices are also driven by volatility. The CBOE Volatility Index (VIX), a popular measure of volatility, remains at an elevated level and is supportive of the price of gold. Fears of a second COVID-19 wave, the upcoming U.S. elections and geopolitical tensions with China remain top of mind for investors. We continue to monitor our gold and gold stock positions within our portfolios, adjusting our exposures based on short-term dynamics, but expect it to remain a staple within our diversified asset allocation framework for months and perhaps years to come.
By Alfred Lam, CFA, Senior Vice-President and Chief Investment Officer and Marchello Holditch, CFA, Vice-President and Portfolio Manager CI Multi-Asset Management
This document is intended solely for information purposes. It is not a sales prospectus, nor should it be construed as an offer or an invitation to take part in an offer. This report may contain forward-looking statements about one or more funds, future performance, strategies or prospects, and possible future fund action. These statements reflect the portfolio managers’ current beliefs and are based on information currently available to them. Forward-looking statements are not guarantees of future performance. We caution you not to place undue reliance on these statements as a number of factors could cause actual events or results to differ materially from those expressed in any forward-looking statement, including economic, political and market changes and other developments. United pools are managed by CI Investments Inc. Assante Wealth Management is a subsidiary of CI Investments Inc. Neither CI Investments Inc. nor its affiliates or their respective officers, directors, employees or advisors are responsible in any way for damages or losses of any kind whatsoever in respect of the use of this report. Commissions, trailing commissions, management fees and expenses may all be associated with investments in mutual funds and the use of the Asset Management Service. Any performance data shown assumes reinvestment of all distributions or dividends and does not take into account sales, redemption or optional charges or income taxes payable by any securityholder that would have reduced returns. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated. Please read the fund prospectus and consult your advisor before investing. Assante Wealth Management and the Assante Wealth Management design are trademarks of CI Investments Inc. CI Multi-Asset Management is a division of CI Investments Inc. This report may not be reproduced, in whole or in part, in any manner whatsoever, without prior written permission of Assante Wealth Management. Copyright © 2020 Assante Wealth Management (Canada) Ltd. All rights reserved.