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Gold, in a investment context, is a commodity that can be considered a separate asset class[1], the others main classes being cash, fixed income and equities.

Some advisers recommend keeping a modest amount of gold (say, 5%[2]) in your portfolio, the main arguments being gold's diversification properties, the belief that it can be an inflation hedge or "store of value", and the idea that it acts as a "safe haven" in times of financial or political crisis. The role of gold in diversified portfolios is strongly debated in the academic litterature, and conclusions depend on which country and which time period is being investigated.

This article reviews some of the arguments in favour, and against, including gold in your portfolio, mostly from a Canadian perspective. It then presents the main ways of buying gold, for investors who choose to do so.

The desire for gold is the most universal and deeply rooted commercial instinct of the human race.

— Gerald M. Loeb[3]

Should you add gold to your portfolio?

The role of gold in portfolios is a contested topic.

Arguments for

Gold as a store of value

According to Erb and Harvey,[4] in roman times, a centurion was paid 38.58 Oz of gold per year, or about about $54,000 (USD) at 2013 prices. They write that "the centurion who commanded 80 legionaries is roughly equivalent to a U.S. Army captain. The current wage for a captain is $46,000 – which is fairly close." In other words, over 2000 years, gold is a good inflation hedge, with a real return of about 0%.[5] In contrast, paper currencies loose their value over time.[6]

Gold as a portfolio diversifier

A commonly cited argument in support of incorporating small amounts of gold in portfolios is that gold is a good portfolio diversifier.[6] This is based on a low or negative correlation between gold and other asset classes.[5][2]

Yearly returns were obtained for the period 1970-2013 at Libra investment management, for 3 month Canadian T-bills, Canadian long bonds (former SCM Long index), Canadian equities (S&P/TSX Composite index and its predecessors), US equities (S&P500), International equities (MSCI EAFE) and gold bullion, all expressed in Canadian dollars. Over this >40 years period, the correlations were:

Can 3 month T-bills Can long bonds TSX Comp S&P500 EAFE
Gold Bullion -0.04 -0.21 0.08 -0.32 -0.08

Gold as disaster insurance

In times of political uncertainty, high inflation, or plunging stock prices, gold tends to do well. So it can serve as "disaster insurance" or "tail-risk hedge".[6][7]

Baur and Lucey (2010) define a "safe haven" as an "asset that is uncorrelated or negatively correlated with another asset or portfolio in times of market stress or turmoil". They examine stocks, bonds and gold in the US, the UK and Germany over the period 1995-2005, using daily data. They find that extreme negative stock returns are associated with rises in the price of gold, confirming the safe haven properties of gold.[8] However, "gold only functions as a safe haven for a limited period of time, around 15 trading days. In the longer run, gold is not a safe haven, that is, investors that hold gold more than 15 trading days after an extreme negative shock lose money with their gold investment."[8]

Arguments against

Not a short term inflation hedge

The problem with the inflation hedge, or "golden constant" (0% real return), argument is that is works over centuries or millenia. But over years or even decades, the price of gold is very volatile. Erb and Harvey find that "over 1, 5, 10, 15 and 20 year investment horizons the variation in the nominal and real returns of gold has not been driven by realized inflation".[5] They add that "gold may very well be a long-run inflation hedge. However, the long-run may be longer than an investor’s investment time horizon or life span."

There are other asset classes, in contrast, which do protect against inflation.[9] Real return bonds track the Consumer Price Index (CPI) and guarantee a positive real return if held to maturity.

Is gold really a good portfolio diversifier?

A good portfolio diversifier has both low correlations with other asset classes and a positive real return. In the case of gold, the positive real return may not be there. Historically, over long periods, gold returns have been low. Jeremy Siegel calculates that "One dollar invested in (US) stocks in 1802 would have grown to $8.8 million in 2003, in (US) bonds to $16,064, in (US) treasury bills to $4,575, and in gold to $19.75." [9]

Ratner and Klein (2008) used monthly returns for stocks from 50 developed and emerging countries, expressed in USD, and monthly gold returns, in USD, for their analysis, covering the period 1975-2005.[2] Over the entire period, the mean annual return for gold was 6%, but "the largest and longest drawdown is a loss of 62.51% for 235 months from January 1980-August 1999". Using mean-variance analysis and other techniques, they show that adding 5% gold to a buy-and-hold portfolio of US and global stocks "demonstrates little to no improvement in the return/risk ratio".

Not a safe haven in Canada

Baur and McDermott (2010)[10] extend the work of Baur and Lucey (2010) on gold as safe haven to many more countries and a 30 year period, using daily, weekly and monthly data from 1979 to 2009. They confirm that gold acts a safe haven in times of extreme stock market conditions in France, Germany, Italy, Switzerland, the UK and the US. But, in contrast, they find that "gold is neither a hedge nor a safe haven for the BRIC countries, Australia, Canada and Japan". Their explanation is that "Canada and Australia both have significant mining interests in their national stock markets, which would tend to cause stocks and commodity prices (including gold) to co-move."

Other arguments

  • Gold in physical form pays no interest or dividends, although precious metal mining companies may pay dividends[11]
  • Is is often mentioned that Canadian investors may already have enough exposure to gold miners in their portfolios through their exposure to Canadian Equities (e.g., [11]). However, in early January 2016, gold mining and royalty companies represented only about 4% of the S&P/TSX 60 index, using the composition of the exchange trade fund XIU as a proxy. So a hypothetical diversified portfolio with a 25% allocation to Canadian Equities would only have a 1% exposure to gold.

Buying Gold

Gold can be added to a portfolio by several different means[12]:

  • As the metal, either as bullion or gold coins.
  • As gold certificates.
  • As exchange-traded funds (ETFs) that hold only gold.
  • As precious metals funds.
  • As stocks in gold mining companies.

Physical gold bullion in quantity has to be stored in secure vaults under guard. This storage has a "cost-of-carry", which usually results in a forward charge called a contango.[13]

Gold coins or gold bullion

Most major cities have gold dealers. Gold can also be ordered from major dealers like Kitco. Individual gold is generally bought in the form of gold coins. The gold Maple Leaf bullion coin made by the Royal Canadian Mint can be purchased at the main branches of many Canadian banks.[14]

Common gold bullion coins
195px-1oz-gold-maple-leaf 3.png American-Gold-Eagle-.jpg 196px-1 oz kruggerand.jpg GoldVienna.png
1 oz. Maple Leaf 1 oz. American Eagle 1 oz. Krugerrand 1 oz. Vienna Philharmonic

Sales tax on gold

The following conditions must all apply in order for the buy or sell transaction to be exempted from GST/HST:

  • Minimum purity must be 99.5% for gold and platinum and 99.9% for silver;
  • Products must be in bar, ingot, coin or wafer form; and
  • Coins satisfying minimum purity levels must have also been issued by a government authority as legal tender.

Gold coins refined to a purity level of 99.5% or greater have been exempted from PST in the following provinces and territories: Alberta, British Columbia, Quebec, Northwest Territory and Yukon. [15]

Gold certificates

Certificates representing various quantities of gold can be purchased from major brokerages.

Gold ETFs

Several ETFs that track the price of gold are available. The largest and most liquid one is SPDR Gold Shares, NYSE symbol GLD, which is also the second-largest exchange-traded fund in the world by market capitalization[16]. Investors can also consider the iShares S&P/TSX Global Gold Index Fund, TSX symbol XGD, which tracks the stocks of gold mining companies, rather than the gold price (see below).

Gold stocks

Major gold companies can be identified by examining the composition of XGD, the iShares S&P/TSX Global Gold Index Fund,[17] which holds major world companies. Several of these companies trade on the Toronto Stock Exchange, and are included in the broad stock indexes. The remaining holdings trade on American stock exchanges as either stocks or ADRs.

Precious metals funds

A list of precious metals funds can be found on Globefund.[18] These funds can hold a combination of bullion and stocks, and the term precious metals includes gold, silver, platinum and other metals.


  1. Dirk G. Baur, 2013, Gold - Fundamental Drivers and Asset Allocation, available on SSRN, viewed January 1st, 2016
  2. 2.0 2.1 2.2 Mitchell Ratner and Steven Klein, 2008, The Portfolio Implications of Gold Investment, Journal of Investing, Vol. 17, No. 8, available on SSRN
  3. Loeb, G. (Mar 27, 2014). The Battle for Investment Survival.
  4. Claude B. Erb and Campbell R. Harvey, Roman centurions and the price of gold today, May 2, 2013, viewed December 31, 2015
  5. 5.0 5.1 5.2 Claude B. Erb and Campbell R. Harvey, The Golden Dilemma, Financial Analysts Journal, vol. 69, no. 4 (July/August 2013), p. 10-42, viewed December 31, 2015
  6. 6.0 6.1 6.2 Tony Daltorio, 8 Reasons To Own Gold, Investopedia, October 14, 2008, viewed January 1st, 2016
  7. Michael Rawson, The role of gold for portfolios, Morningstar, ETF Investing, 2013, viewed January 1st, 2016
  8. 8.0 8.1 Dirk G. Baur and Brian M. Lucey, 2010, Is Gold a Hedge or a Safe Haven? an Analysis of Stocks, Bonds and Gold, Financial Review v. 45, p. 217–229, DOI: 10.1111/j.1540-6288.2010.00244.x
  9. 9.0 9.1 Canadian Couch Potato, Adding Gold to Your Portfolio, February 17, 2010, viewed December 31, 2015
  10. Dirk G. Baur and Thomas K. McDermott, 2010, Is gold a safe haven? International evidence, Journal of Banking & Finance, v. 34, p. 1886–1898, DOI 10.1016/j.jbankfin.2009.12.008
  11. 11.0 11.1 Canadian Couch Potato, Rick Ferri’s Take on Gold, November 3, 2010, viewed December 31, 2015
  12. Wikipedia, Gold as an investment, viewed Feb. 21, 2009.
  13. Wikipedia, Contango, viewed Feb. 22, 2009.
  14. Royal Canadian Mint, FAQ:Shopping, viewed Feb.22, 2009.
  15. USA Gold, Gold sales to Canada, viewed May 27, 2012.
  16. Wikipedia, SPDR Gold Shares, viewed May 27, 2012.
  17. iShares S&P/TSX Global Gold Index Fund, viewed Jan. 17, 2012.
  18. Globefund, Precious Metals Equity, viewed Feb. 22, 2009.

External links