Gold Bullion - A Temporary Hedge in Client Portfolios that has Largely Served its Purpose

May 21, 2021 | Nick Scholte


The 5% hedge position taken in 2020 has recently been reduced by half. Further reduction, or outright elimination, of the remaining 2.5% is imminent.

To my clients:

It was a mixed week for the North American stock markets with the Canadian TSX finishing up ).8%; the U.S. Dow Jones Index down 0.5%; and the U.S. S&P 500 down 0.4%.

Single topic update this week on gold and its role in portfolios…

During the tumult of 2020, positions in gold bullion were added to client portfolios. Over multiple transactions, this position ultimately totaled about 5% of client holdings. Simply put, the position was taken as a hedge against the economic uncertainty running rampant and a way to diversify the defensive portion of client portfolios away from just fixed-income bond investments. The position was never intended to be a long-term investment nor was it intended to be commentary nor endorsement of bullion as an alternate asset class. Again, the position was intended as a short to medium-term hedge owing to the historical record that shows gold, for whatever reason (the reasons are many, long and contentious… I don’t intend to get into the matter here) tends to appreciate during times of crisis. For a period this is precisely how gold behaved as it climbed to over $2,000/ounce. Indeed the position proved a suitable hedge against the volatility of the time.

But late in 2020, and for much of 2021 year-to-date, bullion has not performed as well. Some of this owes to the improving economic outlook and the accompanying decline in “crisis” that bullion is intended to hedge against, but some also attributes to the rise of crypto-currencies like Bitcoin which have become a more easily traded and stockpiled “store” of value. Many view crypto-currencies as an electronic gold replacement and it has become apparent that the rise of these electronic currencies has been syphoning some of the demand for gold over the past year. This became very clear at the beginning of this week as there was a massive correction in the price of crypto-currencies (over 40% in some cases), while gold bullion had an accompanying increase in price (though, sadly, of far lesser magnitude than the decline in cryptos).

In any event, unless inflation runs amok (see last week’s update for a discussion on this topic), I’d argue the period of crisis has, or soon will, end. Economies are re-opening (almost fully in the case of the U.S.), and strong economic recovery is upon us. As part of a major portfolio rebalance about a month ago, I reduced client bullion positions by half. I’ll be further reducing or, possibly eliminating, the remaining position in the near future and allocating to equities. If I do keep a residual position, it will be small – perhaps ~1% - and maintained as a final hedge against the possibility of inflation.

That’s it for this week. All the best, and remain safe,


Nick Scholte, CIM, FCSI

Vice-President & Portfolio Manager

Scholte Wealth Management
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