Hello, and welcome to the inaugural article for Fund Friday! We're off to a fantastic start to the year, with Nasdaq 100 surging nearly 20% by the end of Q1 and the "BTFD" crowd managing to get a rare admission of defeat out of everyone's favourite notorious perma-bear Michael Burry.
Still, the conditions of 2022 are fresh in everyone's minds and for once, risk management is being taken seriously by retail. For the wary out there, the play of the year (and I daresay longer) in my opinion is gold, due to one simple reason: flight to safety and aggressive central bank hoarding.
Some of you might have that crazy "goldbug" uncle out there who hoards his Krugerrands in a pit dug in the backyard, but for the rest of us sane folk a gold bullion backed ETF offers the same exposure, but with much greater liquidity and lower transaction costs. Here's the rundown.
Central bank backing for gold
For those of you who spent the last year getting both your calls and puts blown out by J-Pow's speeches, there's an easier way to play central bank decisions. It turns out that these institutions love gold, and they stockpile it in droves as part of their reserves.
According to the World Gold Council, central banks around the world collectively added a net 31 tonnes to their gold reserves in January 2023. Some of the largest purchases include:
The Central Bank of Turkey: 23 tonnes.
People's Bank of China: 15 tonnes.
National Bank of Kazakhstan: 4 tonnes. Very nice!
The World Gold Council also includes a handy map that shows the relative sizes of each central bank's gold reserves. At this time, the good ol' USA still leads the way at a total of 8,133 tonnes.
At a time where the U.S. dollar's status as the world's reserve currency is being called into question, the role of gold in backing central bank power might see stronger tailwinds in the near future.
The long-term case for gold
Asides from a few drunken YOLO's on 0DTE SPY calls, I'm not exactly a trader. However, as a long-term buy-and-hold investor, I like gold for one simple reason: a persistently low correlation with stocks and bonds, coupled with a historical flight-to-safety effect during periods of market crisis. While the gold is highly volatile on its own, it can provide diversification benefits when rebalanced as part of a portfolio.
Source: Portfolio Visualizer
Canadian gold ETFs to consider
Now, most Canadians going for gold exposure will resort to an ETF like the iShares Gold Bullion ETF Hedged (TSX:CGL) or its unhedged cousin, the iShares Gold Bullion ETF (TSX:CGL-C). The latter is affected by fluctuations in the USD-CAD exchange rate, which can either hurt (CAD goes up) or boost (USD goes up) your overall returns. For a 0.55% expense ratio, they're both OK.
There are lower cost alternatives on the market though, albeit with lower trading volume and assets under management. Purpose Investments offers the Purpose Gold Bullion Fund ETF in both hedged (TSX:KILO) and unhedged (TSX:KILO-B) versions for a 0.23% expense ratio. CI Global Asset Management undercuts them slightly with the CI Gold Bullion Fund, again in both hedged (TSX:VALT) and unhedged (TSX:VALT-B) versions for a 0.18% expense ratio.
You also have close-ended funds like the Sprott Physical Gold Trust (TSX:PHYS), which costs a 0.40% expense ratio. Keep in mind that the market price of this fund can trade at a premium or discount to its net asset value, or NAV depending on buying or selling pressure.
Finally, I have to mention the Royal Canadian Mint Canadian Gold Reserves Exchange-Traded Receipts (TSX:MNT), which can actually be redeemed for bullion in sufficient amounts if you're a baller. I like this one due to its very low counterparty risk given that its government backed as a crown corporation.