Is it finally time to brave the recent dip in the price of gold (and maybe even silver) after Wednesday’s much-needed relief bounce over hope that a peace deal can be reached with Iran? Indeed, that’s the big question, and while it’s impossible to know if Wednesday’s relief rally in the precious metals is the start of a sustained run back to prior heights, I do think that investors should ask themselves why they’re interested in pursuing gold on the dip. Is it because you’re looking to trade a previously hot asset?
Or are you trying to fit a terrific alternative asset into your portfolio for more diversification and returns that might be more stock-like moving forward as the “debasement trade” thesis makes its way back to the gold markets?
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A golden opportunity to buy the dip? Maybe.
Any way you look at it, there’s more than one reason to add a bit of golden shine to your TFSA portfolio. It has its shortcomings. Most notably, it doesn’t pay a dividend, and the costs of storage could weigh over time. That said, there are a handful of ways to play gold as well. Some ways are more productive (think dividends on the miners) without requiring you to pay a dime in storage costs.
Of course, if you’re more about physical bullion and less about getting more operational leverage behind a move in gold prices, there are physical gold ETFs. Gold ETFs are relatively cost-effective, at least compared to paying a premium on gold coins at a premium to spot while renting out a secure safe to store it. Sure, it’s more fun to be able to hold your gold, but it’s less practical and far more expensive.
Sprott Physical Gold Trust
A security like the Sprott Physical Gold Trust (TSX: PHYS) is, by far, my favourite way to bet on physical gold. It’s easy, and the management expense ratio (of 0.4%) is quite reasonable, though not the lowest for investors willing to venture into U.S.-traded gold ETFs.
The big key takeaway is that Sprott is a physical closed-end fund (CEF) that tends to trade at a mild discount. If you’re looking to bet on gold at a 1–3% discount to net asset value (NAV) at any given time, I’m a fan of the PHYS. In fact, I like it a bit more than the miners at this juncture, given the relative stability and the diversification benefits it can bring to a TFSA.
Of course, if you’re a gold mega-bull, it’s hard not to want to inject your TFSA with some miners as well, especially if you’re a fan of the dividends and the dividend growth to come as miners look to get swamped with cash due to the past year of gold price appreciation. I think it makes sense to prioritize gold, but add a hint of mining exposure for more explosive upside (and downside) if you’ve got the stomach for volatility and won’t be horrified if the latest pullback in gold worsens.
The bottom line
In short, I like gold very much and think it’s a great pick-up on this year’s weakness. It should have soared when the Iran war began. But it seems to be doing the opposite. Regardless, I think the debasement trade is in the driver’s seat, rather than the geopolitical risk-hedging benefits.
