Gold has tripled in value since 2008. Its spectacular upward rise seems almost unstoppable as investors seek certainty and stability in the precious metal, amid a storm of economic uncertainty.
It's what many have described as a modern-day gold rush. But instead of grizzled, cranky old prospectors getting rich, it's slick investors capitalizing on the falling equities markets.
But what does it all mean for you? CTV sat down with Craig Alexander, chief economist for TD Bank, to find out whether all that glitters is really gold.
We seem to be in the midst of a gold rush of sorts. Why does everyone seem to be investing in the precious metal?
Gold is generally seen as a safe haven investment. That means, simply, that when the economy is in turmoil, investors flock to gold for its predictability and stability. And as investors do that demand increases, and generally so does value -- meaning it can be a winning investment when everything else seems to be crumbling.
"What you see is gold being used as a place to hide until some of the volatility disappears," Alexander told CTV's Canada AM.
What are the risks of investing heavily in gold?
While gold is typically a sound investment in turbulent economic times -- indeed, it has tripled in value since 2008, recently surpassing US$1,700 an ounce -- it usually declines as the economy improves.
When the U.S. greenback goes up in value, for instance, gold typically experiences a pullback. Same with equities markets. As they experience growth, gold usually loses value.
If some of the major economic concerns are addressed and the economy stabilizes and even begins to expand, the price of gold will come down, Alexander said.
But with fears about the downgrade of the U.S. credit rating and ongoing debt concerns in America and Europe still lingering, it may be some time before any of those scenarios play out, Alexander said.
"There are still an awful lot of risks out there," Alexander said.
He added: "I think what we're going to see is gold remains extremely well supported over the next couple of years."
So should I dump my equities investments and put all my money in gold?
The short answer is no. According to Alexander, gold can be a valuable component of any portfolio. But it should be used in moderation, as a tool for mitigating losses when equities fall. A healthy balance for an investment portfolio, he said, would be to have 5 or 10 per cent exposure to gold.
"Gold does well during bad or uncertain economic times, so if you have a little bit of gold in your portfolio it helps cushion from the volatility and downside risk," he said.
Alexander said gold acts as sort of a safety valve against the pressures of a weak economy.
"I kind of view gold the way I do the airbags in my car. I don't expect to have an accident, I don't expect to need those airbags, but you know what, it's nice to have them there just in case something goes wrong."
How closely should I follow the markets? Should I be trading day-to-day based on what's happening?
Again, the short answer is no. The past week is a perfect example of how unpredictable the markets are from day to day, Alexander said. On Monday, markets around the world saw massive losses. On Tuesday, North American markets bounced back and recovered most of the losses. On Wednesday, the Canadian markets were essentially flat but the rest of the world's markets were mostly down.
"There has been gut wrenching volatility and really investors shouldn't be responding to it, what they need to do is ensure they have a well-diversified portfolio," Alexander said.
