'A 10% return isn't bad for a dull asset that doesn't do anything'

by James Burton, Wealth Professional

Gold bull hits back at negative view and says that thinking of it as a commodity is a mistake

When someone calls gold a “dull investment’, you can be sure at least one investor in Canada is bristling with annoyance – and that man is Nick Barisheff.

Barisheff is the founder and CEO of Bullion Management Group and has 100% of his portfolio in his own funds. A 24-karat gold bull, in other words.

So when Morningstar’s Alex Bryan released a piece headlined “Gold Is a Dull Investment” and that it “doesn’t boost expected returns” but reduces them, it piqued his interest. The article goes on to say the “commodity” can still serve as a hedge – albeit an imperfect one – against tail risk and inflation.

“The first point is that, since 2000, in every currency around the world, gold has averaged more than 10% a year,” Barisheff responded. “People are surprised by that and when you consider that most pension funds target 6%, and in many cases don’t get it, then 10% isn’t at all bad for having a dull asset that doesn’t do anything.”

From a big-picture viewpoint, he told WP that, in his opinion, the fundamental mistake with the article is the common error of classifying gold as a commodity. Barisheff said that, even if you do view it as one, there are many high-tech and medical applications for gold where there are no substitutes, and the same applies for silver and platinum.

He added: “But the thing is, gold, silver and platinum have all been money for between 3,000 to 5,000 years and have held up extremely well against all currencies. There’s been 60 hyperinflations of fiat currencies in the past 100 years where the currencies ended up being totally worthless. Thinking of gold as a commodity is the first basic mistake. Bank of International Settlements last year passed new rules where commercial banks and central banks can treat gold as a zero-risk monetary asset equal to U.S. dollars and U.S. treasuries.”

The ability of gold to act as a hedge taps into the commonly held view of it as a safe haven from market volatility. In his article, Bryan writes the best reason to own gold is to protect against market meltdown and inflation, adding that over short periods, gold has been uncorrelated with stocks, but over longer periods, the two assets have been negatively correlated. He warned, though, that there is no law this relationship will always hold.

Barisheff is, naturally, more vociferous as to gold’s strengths. “You have a lot of writers and CFAs [talking about owning] small cap, large cap, international … but the thing is, all equities and even equities with bonds are correlated, so they all tank together. Diversification amongst all kinds of different stocks is no diversification whatsoever. When you have gold it is – it has lower volatility and improves returns.”

New players in the “safe haven” category are cryptocurrencies and, in particular, Bitcoin. Barisheff, though, dismisses these as a fad and tulip mania. While recognizing the limit on the creation of new Bitcoin as a strength over fiat currencies, he said there are too many cryptocurrencies combined and none are transparent enough.

Turning his thoughts to 2021, he told WP that conditions look good for gold bullion.

“We went up $70 million in assets during the first few months of COVID before flattening out recently. I think we will do extremely well in 2021 because the central banks of the world will have to print, in my mind, four times as much money as they printed in 2020, simply because this year they printed money and paid people not to work. Then  they’re going to have to figure out how to get the economy going again, and that’s going to take a lot of money because many businesses are not going to recover from this.”

He added: “Gold does boost returns. Unless you pick stocks like Apple or Google that have gone crazy. But if you’re looking at the indexes, like the S&P and the Dow, gold has outperformed both.

“Right now, we’re sitting on the most overvalued equity markets in history. We’re poised for a major decline and what’s been happening is stock prices have been going up because the central bank’s printing money, but the earnings have been going down. So, we’ve got a big divergence. That doesn’t hold.”