E Point Perfect

Making sense of the markets this week: June 12

1) Consumers are shifting their preferences away from the “all goods all the time” pandemic trend and back to a more service-heavy buying pattern. 

2) Retailers that can control their expense budget lines while also doing their best to rein in price increases will be rewarded by cost-conscious buyers.

Does high inflation = high returns for gold?

On Friday morning, the U.S. Labor Department announced that U.S. inflation hit a new 40-year high of 8.6% in May, more than Wall Street was expecting. Disappointed investors quickly pushed the Dow down more than 2.5%, the NASDAQ down more than 3% and the TSX more than 1.5%.

All of which might augur well for the price of gold, one might think. But apparently not: The price of gold has gone up nearly 40% over the last three years, but the current price of USD$1,852 per ounce is down from a high of USD$2,035 in August 2020.

Source: Business Insider

While folks such as Harry Browne and his “Permanent Portfolio” have proposed gold as an inflation hedge in the past, it hasn’t been all that useful in a hedging capacity in recent memory.  In fact, contrary to many people’s almost religious devotion to the precious metal, gold hasn’t been a very good long-term investment. (You might remember my column from a few weeks ago, when I explained that bitcoin being called “digital gold” wasn’t exactly a compliment.)

That said, whether or not you believe the price of physical gold will go up, the cash flows and profit margins of gold mining companies are often a little easier (and more profitable) to predict. Gold miners have done well over the past three years, and generally speaking, when the price is over $1,200 per ounce, Canadian mining companies have no problem making money.  

Gold Fields (GFI/JSE), the world’s sixth-largest gold miner, made news last week when it announced the $6.7-billion acquisition of Canada’s Yamana Gold (YRI.TO). The all-share deal valued Yamana stock at a 33% premium over its 10-day moving average. Initially, the deal was viewed as a sign of strength in the sector, but with Gold Fields shares dropping 23% since the announcement, the reaction has become mixed, and there is some skepticism as to whether the deal will get completed.

If you’re looking to invest in gold, there are much easier ways of getting portfolio exposure than buying a vault to house bars of the shiny stuff. Canada has several ETFs that allow you to invest in gold in a variety of ways. The Horizons Gold ETF (HUG/TSX) uses futures contracts (a.k.a. “paper gold”) to track the price of gold, while the iShares S&P/TSX Global Gold Index ETF (XGD/TSX) will give you instant exposure to gold mining companies operating in Canada and around the world. Finally, the iShares Gold Bullion ETF (CGL/TSX) actually takes investors’ money and purchases physical gold bullion. 

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