What does gold’s recent outperformance mean for your portfolio?
Here’s a point to ponder: why is gold so valuable? At first blush, that might seem like a strange question – gold is valuable because … well, it’s always been valuable. Right?
True enough. But that doesn’t really answer the deeper question, does it? When you think about it, there’s nothing particularly special about gold. Sure, it looks pretty but, other than its use in wedding rings and other jewellery, it has very little industrial function or utility. It pays no interest or dividends. It’s not really tied to the growing value of a particular company or economy or national currency (at least, not since 1971). In fact, the only thing which makes gold valuable at all seems to be that most everyone in the world agrees that it has value.
Whatever you think about this mystery, there’s no denying that anyone who’s invested in gold has done extremely well of late. In the face of mounting trade wars, heightened geopolitical rivalries and massive trade deficits throughout most of the developed world, investors have increasingly turned to the one asset that everyone believes has value. In fact, over the past few years, gold has been one of the top-performing financial assets in the world (see CSA News Issue #135 for more details). If anything, as such conflicts (both political and economic) continue to fester, most analysts and market watchers agree that the reasons for gold’s outperformance seem to be getting stronger.
Which raises some important questions: what are the factors driving gold’s run up the investment charts – and how long will they continue? What are the pros and cons of investing in gold and precious metals? And, most important, is now the time to invest in gold and/or other precious metals? Or has the train already left the building?
Given gold’s recent strong performance (and the prospects of similarly strong performance in the years to come), now seems like a good time to answer some of these questions and take a closer look at the role which gold and precious metals can play in your portfolio.
What’s going on with gold: a brief recap
If you’re already a precious metals investor, you’re well aware of gold’s outperformance over the past 24 months or so. But if you’re not, it’s fair to say that gold has been shining pretty brightly lately, posting significant gains that have outstripped those of most other assets over that time frame. As the following chart makes clear, for as much as artificial intelligence stocks have captured the headlines lately, it’s been good old-fashioned gold that has seen truly impressive performance.
Gold price performance July 2020-July 2025
Chart data: Kitco
It may be a little difficult to see on the chart but, despite gold’s meteoric rise since late 2023, it’s been trending sideways since at least the spring. Most market watchers attribute that to a “cooling off” of the belligerent tariff rhetoric and trade actions of the U.S. administration. The first few months of the year were the time of peak uncertainty regarding tariffs and trade wars; after that, there’s been a bit of a calm period with extensions granted and a general dialing back of the “worst-case scenario” tariff rates, somewhat alleviating investors’ worries and anxieties. Since then, other precious metals have started “catching up” to gold’s performance, with silver, platinum and palladium enjoying impressive gains, while gold has largely held steady around its April price. Many analysts see this broadening of precious metals’ strength as a sign that the underlying fundamentals behind the rally continue to be strong.
Although this very short-term consolidation is probably irrelevant to long-term investors, it’s a reminder of how susceptible gold and precious metals can be to rapid shifts in political and economic sentiment. As investors’ level of economic anxiety changes, the price of precious metals can change rapidly – definitely something to keep in mind if you’re interested in investing in the space.
Why gold has been so “golden” lately
In the past, the performance of gold has been strongly tied to the strength (or lack thereof) of the U.S. dollar and, to a lesser extent, to the level of turmoil (both political and economic) in the world overall.
This connection is still largely true, but there are now additional macroeconomic issues which are reinforcing or amplifying this tendency. To use a rather tired cliché, this “perfect storm” of conditions seems to be making gold an extremely attractive choice for investors concerned about the state of the economy and the world. These include:
Inflation – Coming out of the Covid-19 epidemic, many of the world’s economies have experienced stubbornly high inflation. This is exactly the kind of environment that benefits gold because, historically, gold has been a hedge against currency debasement. As the purchasing power of a dollar (or a euro, or a yen, or a pound, or whatever) declines, the purchasing power of gold tends to remain the same. The longer this inflationary environment persists, the stronger the fundamentals for gold and precious metals.
Central bank purchases – Central banks are by far the largest purchasers of gold and precious metals. Over the past few years, many of them (including those in China, Russia, Turkey and India) have been on a record gold-buying spree – in 2022 and 2023, central bank gold purchases hit their highest levels in decades. Most analysts suggest that the move stems from a desire to diversify away from the U.S. dollar, a move that will likely continue as long as the current U.S. administration uses economic pressure to accomplish its political goals.
Wars, conflict and uncertainty – We live in interesting times, as evidenced by the ongoing war in Ukraine, continued conflict in various Middle East countries and the rise of a new Cold War between the United States and China. All of this turmoil has driven up demand for “safe haven” assets – gold and other precious metals among them. As the level of conflict continues to rise, it seems at least plausible that gold will continue to do the same.
Weakening U.S. dollar – While the U.S. dollar has remained stronger than many Canadian snowbirds would like, it has actually given up some ground against most major world currencies over the past year or so, largely due to the expectations of future rate cuts, along with the massive (and growing) U.S. fiscal deficit and debt. A weaker U.S. dollar makes gold cheaper to purchase for non-U.S. investors (remember, gold is denominated in U.S. dollars) which, in turn, boosts demand.
Will such conditions continue? That’s the 24-karat question. While no researcher, analyst or market watcher has a crystal ball, most agree that the above factors will continue to affect the world economy for at least the foreseeable future. That should mean a bright future for gold and other precious metals – at least until underlying conditions change.
What can gold do (or not do) for your portfolio
On one level, the rationale for investing in gold is pretty simple: you invest in gold because there’s an opportunity to make money.
Well, sure. But your portfolio allocation decisions should be more strategic than that, and express broader goals and ambitions beyond simply becoming richer. Ideally, there should be specific reasons why allocating to a certain asset class makes sense for you, and specific objectives which you’re looking to accomplish by adding that asset to your portfolio. Fortunately, there are several reasons why including an allocation to gold (or perhaps to other precious metals) might make sense. Such as:
Low correlation with other assets – Perhaps the most compelling reason to invest in gold is because of how “detached” the performance of gold is from the performance of other assets. The following chart gives you a glimpse of what we mean – the price of gold often moves independently of (or even inversely to) the stock market. This basic feature of how gold can smooth out disappointing performance in other investments makes a pretty compelling argument for including at least a small allocation to gold in your portfolio, particularly when volatility in traditional assets such as stocks, bonds and real estate seems to be the order of the day.
Average annual returns S&P 500 versus Gold
Chart data: Investopedia, TradingView
Store of value – Gold is fundamentally different from other forms of money in the world: it’s very difficult to make (or more accurately, mine) more of it. This scarcity is one of the big reasons why it tends to hold its value over time. It’s also a big reason why gold tends to do well during times of inflation. For snowbirds who rely on the proceeds of their portfolios to fund their day-to-day living expenses, this ability to hold its value against the erosion of purchasing power can make gold a pretty attractive asset.
Safe haven in times of volatility – When geopolitical tension or economic uncertainty is on the rise, gold often (though not always) enjoys strong performance. Much of this is because of gold’s reputation as a safe asset – the one asset that will at least hold its value when everything else in the world is in trouble. Not only can this provide a kind of anchor for more volatile assets within your portfolio, it can also provide you with considerable peace of mind.
Currency independence – Gold (and, to a lesser extent, other precious metals) is the closest thing we have to a “universal” form of money; it’s recognized and accepted almost anywhere in the world, usually at a transparent price that isn’t tied to any specific government, political system or geographic region. That quality makes it a lot less vulnerable to monetary policy, political events or conflicts that affect other national currencies. For investors concerned about their overexposure to a particular currency, that’s a very positive quality.
As attractive as these benefits are, there are several downsides to investing in gold. These include:
Lack of income – Unlike a lot of other assets, gold doesn’t generate interest or dividend income. Nor is its value tied to a growing stream of future profits or rents. For snowbirds who rely on their portfolios to generate income, that can be a bit of a bummer, particularly when there are a variety of other investments that can deliver cash flow in the here and now.
Volatility – Gold is a notoriously volatile asset, subject to wild mood swings based mostly on sentiment and perceptions, rather than on the kinds of business fundamentals which drive the performance of most stocks over the long term (the volatility goes double for silver and other precious metals). For investors who find themselves staying up at night fretting about short-term market movements, that volatility could be more trouble than it’s worth.
Storage and other hassles – For those who choose to invest in physical metal, finding a place to put your investment can be a hassle. A home safe is one option; however, it needs to be professionally installed with a proper security system or it could be a target for theft. A safety deposit box is another possibility, but these incur additional costs. Liquidity can sometimes be a concern as well, since selling a bunch of gold coins or bars quickly at a fair price isn’t always as straightforward as selling stocks or bonds.
Herd behaviour – Because the performance of gold and precious metals is often driven by sentiment, they can be highly susceptible to herd behaviour – the tendency for investors to “pile on” to a given asset after it’s seen exceptionally strong short-term performance. This amplifies volatility and can make timing a purchase or sale more challenging.
Not a “productive” asset – Unlike a lot of other assets, gold doesn’t do much for the overall economy. Once you dig it up, it doesn’t employ a whole lot of people, contribute to a growing industrial base or create new technology or innovations. That may not be an issue for some investors. But for others who prefer their money to contribute to the greater good (whether economic, environmental or social), gold might have a lot less to offer than other investments.
What’s the best way to invest in gold?
In the past, an investment in gold or silver meant stashing bars or coins in a locked chest buried in the backyard. These days, there are many other ways in which you can secure exposure to precious metals.
Physical gold
Bars, bricks, coins, wafers, nuggets, or even jewellery – for those who prefer the security (either real or psychological) that comes with holding physical gold, there are plenty of options to investigate. Keep in mind, however, that some of these options (particularly jewellery) have higher markups than the price of the actual gold which it contains. Fees and other costs associated with buying physical gold also tend to be a lot higher than what you’d pay to buy securities.
ETFs, mutual funds and physical trusts
Pooled products – mutual funds, exchange-traded funds (ETFs), trusts and similar structures – are probably the most convenient way to gain precious metals exposure. They can be bought or sold easily, usually at very little cost, and there are none of the storage hassles that come with holding physical gold. A relatively new twist on the pooled structure is the physical trust – unlike an ETF or mutual fund that holds paper claims to the underlying metal, a physical trust buys and stores physical metal on behalf of its unitholders. For some, this tangible ownership structure adds a layer of security and peace of mind that a paper contract just can’t provide.
Gold mining stocks
Instead of investing in precious metals themselves, you could invest in the companies that mine them. Doing so gives you more potential for growth than physical gold; as company management improves its production and extracts more profit from their operations, it’s possible that share prices will rise faster than the price of the gold itself. Keep in mind, though, that the reverse is also true: if company management makes poor decisions, if operational issues put pressure on profit margins, or if corporate debt level rises too high, the share price can drop, even as the price of gold rises.
Canada has long been home to a group of well-known, well-established gold miners. Barrick Gold, Kinross Gold and Agnico-Eagle Mines are some of the best-run gold companies in the world, with international operations, deep management expertise and a long track record of profitability – along with stock prices which reflect that excellence. Canada is also home to a great many junior and speculative gold mining companies that offer the potential for extraordinary returns, albeit accompanied by considerable risk.
Streamers and royalty companies
Another possibility is to invest in the companies that purchase royalties and revenue streams from precious metals miners. Canadian companies such as Wheaton Precious Metals, Franco-Nevada Corporation and Sandstorm Gold serve as financiers for exploration efforts and mine production costs. In return for a large lump sum, they receive an ongoing slice of mineral production (usually at a discounted rate) for a given number of years. Such a structure allows the streaming company to build a portfolio of mineral royalties and streams without having to deal with the execution and operational risk of running an actual mine. That’s a pretty attractive structure which minimizes risk for investors – part of the reason why such streamers often trade at lofty valuations.
If you’re interested in adding some gold to your portfolio, don’t just jump in. Precious metals (and mining in general) can be a notoriously volatile sector of the market, with significant swings both up and down that depend on a variety of economic and political factors which can be very hard to predict. All of which means that it’s vitally important to do your homework before you put money to work in the sector, and thoroughly understand the longer-term strategic rationale for including gold in your portfolio.
Ideally, that homework should include a discussion with an experienced financial professional, one who can help you articulate the strategic purpose of your investment and identify investment options appropriate for your risk tolerance and your long-term goals. This is the best way to ensure that your investment in precious metals stays golden throughout your retirement.