Why investors are quickly overcoming stigma around gold

The sheer magnitude of the forces underpinning the bullish gold rush will force many investors to overcome any stigma around the asset class, according to one portfolio manager.

Hans Albrecht, of Horizons ETFs, believes the waves of stimulus unleashed to prop up markets and economies in the wake of COVID-19 contrive to offer a compelling case for gold, which jumped over $1,800 yesterday for the first time in nearly nine years.

As the pandemic continues to wreak havoc in many U.S. states, investors are turning more and more to the traditional safe haven. Goldman Sachs reportedly expects the precious metal to go even higher, setting a 12-month price target of $2,000.

Albrecht compares the “old math” to the “new math”, a result of central banks and governments being reluctant to let market forces play out on their own for more than a decade. Instead, they’ve become addicted to various forms of stimulus, not just to charge up economies, but to prevent any kind of downturn.

This habit, he added, has been accelerated by COVID-19, which has given central banks license to – in the words of Mario Draghi – “do whatever it takes” to support and, hopefully, reinvigorate growth.

Albrecht said: "Gold, in the end, is the sort of millennia proven way to hedge against some of this new math - the financial engineering, money printing and assault on fiat currencies – and a zero-rate environment makes that easier. Gold has always competed with other yield-producing instruments and assets – and now there isn't  much competition because you're looking at negative real yields, and even negative nominal yields, around the world.

“People are looking into the ‘old math’, which is something you can't print more of, as much as they might try! That's something that resonates with investors right now with something [gold] that's been underowned for a lot of years. It's becoming a bit more of the talk and more of a narrative for investors, not just the tin-hat, doom-and-gloom, sky-is-falling people.”

Albrecht suggested, for investors who qualify that this kind of asset fits their objectives, between 5%-10% allocation in gold, or 5% in miners for diversification. Yesterday, the fund provider lowered the manager fee on its Horizons Gold ETF (HUG) from 0.65% to 0.20%, opening its arms to investors seeking exposure to gold bullion via what it believes is one of the lowest-cost gold ETFs in Canada.

Albrecht acknowledged that, traditionally, it’s taken a certain kind of investor and advisor to recognize the value of gold. However, he predicted continued uptake as people pivot to the new narrative that it’s a hedge against unprecedented financial engineering and currency debasement.

“The better it does, the more people start to look at it,” Albrecht said. “It isn't Bitcoin, it's something that's been proven for a long time and its performance over the past 20 years speaks for itself. There is a little bit of that stigma but now is the time it can be overcome because of the sheer magnitude of the forces that are underpinning that bullish viewpoint.”

For many, gold is a win-win situation, despite equities and the precious metal being positively correlated. The Toronto-based portfolio manager said this is a new picture for investors considering gold is typically considered a hedge. However, he said that either stimulus continues to push assets up, including gold, or COVID-19 presents more difficulty and even more stimulus is needed to underpin the global economy, which is also a good scenario for gold.

Investors need to be wary of a recovery and a vaccine, which would make gold less attractive but, while despute the recent correlation with equities, Albrect expects the market to eventually run into a “wall of reality” in which earnings will suffer.

He said: “It's a headline-driven market right now and the glass is very much half full. But I think eventually the market has to run up against some version of fundamentals and then you start to see gold outperform versus the market as it decouples and continues to do well based on more stimulus.”