All That Glitters is Not Gold

August 2020

By Alfred Lam, CFA, Senior Vice-President and Chief Investment Officer and Marchello Holditch, CFA, Vice-President and Portfolio Manager CI Multi-Asset Management

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.

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