I’ve had a long and considered relationship with gold. Back in the early 2000s, John Embry, a well-known RBC precious metals manager, did a presentation at my office, making a compelling case for why bullion (then sitting around $250 to $300 an ounce) was dramatically undervalued. His central thesis was based on two things – US gold reserves were materially overstated, and the dollar itself was on shaky ground – a consequence, he argued, of Nixon’s 1971 decision to abandon the Bretton Woods agreement. This was the post-war framework that had anchored the dollar to gold and made it the world’s reserve currency. Once that link was severed, the dollar became a currency backed by nothing but faith in the creditworthiness of the US government. Embry believed this conviction was misplaced, and that gold would eventually reflect that reality.

In 2001, I started buying gold for clients – both gold and various precious metals companies. For those of you working with me back then, you may remember there were many times that bullion and gold mining stocks dominated our conversations – which companies were tracking gold, which ones weren’t, and why that divergence was so frustrating. A few people even started calling me Goldie.

The value of gold didn’t move overnight but climbed steadily and, as the financial crisis (2008) took hold, it ran up exponentially. By 2011 the price had gone from $268 to nearly $1,900 an ounce. Then the price did what it does as markets stabilize – it essentially went nowhere for the better part of eight years, drifting between $1,100 and $1,500, until Covid sparked a frenzied buying spree in 2020, with another drop in 2022, when interest rates began climbing.

As gold approached $1,900 in 2011, I began locking in gains. Later, as the years of modest 2 - 3% annual returns (before inflation) accumulated, I reduced further. A number of clients were retiring or in the early planning stages and therefore it made a lot more sense to deploy those dollars into dividend-paying companies offering steady, tax-efficient income.

Equity markets have been in overbought territory since last fall, therefore I’ve been rebalancing more actively, and as a result we’re sitting on roughly 8 to 10% cash reserves across most portfolios. This has been what I call a “defensive play”, so that when the correction does come, we have cash to deploy. It is from this vantage point, twenty-five years later, that I am once again suggesting clients hold some physical gold.

The US political and fiscal landscape has shifted in ways that would have been inconceivable even ten years ago, and therefore the macro case for gold is compelling. Central banks outside the US now hold more bullion than US Treasuries for the first time in twenty years – a direct consequence of Russia’s $300 billion in US dollar reserves being frozen in 2022. Add sovereign debt levels that would have been unthinkable a generation ago, and the argument for holding something tangible outside the traditional financial system becomes difficult to ignore.

Gold climbed from $4,300 to $5,400 an ounce in January alone. Then the Iran conflict began in February, and most analysts expected it to continue moving higher. Instead, it retreated to around $4,600. You might then wonder, isn’t war exactly the kind of event that’s supposed to push gold higher?

Historically, yes. But this conflict came at an unprecedented time when the metal was already elevated after a substantial run, with a large number of motivated sellers. The closure of the Strait of Hormuz pushed fuel, food, and fertilizer costs to multi-year highs, across much of the world. Governments needed liquidity fast, and gold – at near-record prices – was the obvious target to monetize. Turkey alone disposed of 127 tons in a matter of weeks, its largest and fastest sell-off on record. Private and institutional investors with portfolios under pressure responded similarly. Gold wasn’t abandoned as a safe haven – it functioned as one, just differently than expected. When everything else was under pressure, bullion was the one position that could be liquidated at a meaningful gain to cover losses elsewhere.

The major US banks – Goldman, UBS, Morgan Stanley – have trimmed their near-term targets but still anticipate a meaningful recovery before year-end. Deutsche Bank has a forecast of $8,000 an ounce by 2031. The current pullback looks more like a liquidity-driven pause than any fundamental shift in direction.

For those clients that don’t already have a position, I’m starting to buy the Sprott Physical Gold Trust (either in US or Canadian dollars). The trust holds fully allocated gold bars stored at the Canadian Mint, a Crown corporation of the Government of Canada. This isn’t paper held by a bank – it’s sovereign-backed bullion in Canada, with deep daily liquidity. At current levels the trust is trading at a modest discount to its underlying gold value, making this a particularly attractive entry point for a long-term hold.

Thanks as always, and please do not hesitate to touch base with any questions.

Libby

As a reminder, if someone you know could benefit from a second opinion and fresh perspective, it costs nothing and can be invaluable for those who feel they’re not getting the care and attention they deserve. Please pass along my contact information to them. Thank you!

This information is not intended as nor does it constitute tax or legal advice. Readers should consult their own lawyer, accountant or other professional advisor when planning to implement a strategy. This information is not investment advice and should be used only in conjunction with a discussion with your RBC Dominion Securities Inc. Investment Advisor. This will ensure that your own circumstances have been considered properly and that action is taken on the latest available information. The information contained herein has been obtained from sources believed to be reliable at the time obtained but neither RBC Dominion Securities Inc. nor its employees, agents, or information suppliers can guarantee its accuracy or completeness. This report is not and under no circumstances is to be construed as an offer to sell or the solicitation of an offer to buy any securities. This report is furnished on the basis and understanding that neither RBC Dominion Securities Inc. nor its employees, agents, or information suppliers is to be under any responsibility or liability whatsoever in respect thereof. The inventories of RBC Dominion Securities Inc. may from time to time include securities mentioned herein. RBC Dominion Securities Inc.* and Royal Bank of Canada are separate corporate entities which are affiliated. *Member-Canadian Investor Protection Fund. RBC Dominion Securities Inc. is a member company of RBC Wealth Management, a business segment of Royal Bank of Canada. ® /™ Trademark(s) of Royal Bank of Canada. Used under license. © Royal Bank of Canada 2024. All rights reserved.