Gold as Portfolio Insurance - nafrottawa.comHow Royalty Streaming Companies work •Similar to Venture Capital firms, but for mines/energy. • They receive a small % of each ounce

Gold as Portfolio Insurance September, 2020

Disclaimer

• Nothing in this presentation should be considered as advice or recommendation

• The author has no opinion as to the future direction of stock, commodity or foreign exchange markets, including gold.

• All investing involves risk

• Readers should seek the advice of a registered financial/investment adviser or conduct their own due diligence before making any investment

Acknowledgements

• NAFR Ottawa, Linda Barber, for organizing and sponsoring the webinars

• Michael Patenaude, Ottawa Share Club for the excellent graphs

• Frank Schilder for acting as Zoom Master

Why we buy insurance:

• Life insurance, despite the fact that we don’t expect to die within the span of most term policies, and we want to protect our family’s wealth.

• House insurance, despite the fact that we don’t expect our house to burn down, and we want to avoid catastrophic loss.

• Car insurance, despite the fact that we don’t expect to cause an accident, and we want to avoid catastrophic loss.

• Portfolio insurance, because we don’t know what the future holds and we want to avoid catastrophic loss and protect our family’s wealth.

Why gold could be considered for your portfolio

• Gold often does best when most other investments do worst • Negative Beta

• Recessions = low interest rates, when gold does well

• Central banks printing money debase the confidence in fiat currencies

• Top investment strategists recommend having a position in gold • Rosenberg

• Dalio

• Pape

Poll question 1

• Looking forward 2 years, I predict that the Canadian economy will:

• 1. Improve

• 2. Decline

• 3. Stay about where it is now

• 4. I’m moving to Bora Bora

Canadian economy entering “unknowable times” Stephen Poloz, Former Governor, Bank of Canada, May, 2020

“Those who cannot remember the past are condemned to repeat it.”

George Santayana,

1863-1952

Gold compared to the S&P 500

1990 – gold flat, S&P 500 up

2001 recession – $300-$700

2008-09 recession – $700 - $1895

2012 – gold falls, S&P 500 at 2007 level

2019 – gold rises with negative real interest rates $1100-$1400

2020 – gold rises 20% in CAD as Covid 19 hits

Gold Bullion versus S&P 500 Negative Beta

Poll question 2

• Over the past 20 years, which increased in price by 550% ?

• 1. Gold Bullion in US$

• 2. The S&P 500

• 3. The TSX 250

• 4. My Ottawa house taxes

Gold price reacts to declining interest rates

Gold reacts positively to rising LT bond prices

Buffet buys US$550 million of gold miner Barrick

• “Buffett’s move into Barrick … is more about a bet on nominal interest rates staying ultra-low and real interest rates… going more negative, and there is no asset class that benefits as much from that than physical gold and the gold mining stocks”.

• David Rosenberg, September 11, 2020

They ain’t making a lot more gold

International Central Banks have been buying (World Gold Council)

Recent gold investment performance Total Return including reinvested dividends

• Bullion ETF: CGL.C in CAD

• Franco Nevada: Royalty stream business - like a managed ETF

• Gold miners’ index ETF: XGD

Investment 1 Year % 5 Years %

Bullion CGL.C 29 70

Franco Nevada

58 279

XGD ETF 60 223

A portfolio of gold miners has positive beta of 2.2 to gold

• Beta measures the responsiveness of a stock's price to changes in the overall market – gold in this case.

• But what goes up twice as fast can also come down twice as fast

Gold bullion vs XGD vs FNV – one year

Gold bullion vs XGD vs FNV – 5 years

Why gold miners outperform bullion in up markets by 2.2 times

• Barrick’s all in cost to produce an ounce of gold: $950

• Profit at $1950 gold: $1000

• Profit at $2500 gold: $1550

• Per cent increase in profit: 55%

• Per cent increase in price of gold: 28%

• BUT in bear markets, most decline at the same multiple

How Royalty Streaming Companies work

• Similar to Venture Capital firms, but for mines/energy. • They receive a small % of each ounce of gold produced, based on their original

investment

• Royalty Streamers have no operational cost risk and are highly diversified • FNV has 57 active royalty streams, and 200 investments in the pipeline

• If gold goes up, they reap 100% of the increase as profit

FNV versus XIC and VUN – 6 years

Percentage of gold miners in TSX 250

Materials make up 14% of TSX

About one half of that is gold

The 5 largest gold miners in the TSX:

Barrick

Franco Nevada

Goldcorp

Agnico Eagle

Kinross

Conclusions 1

• Gold often increases in value when:

• Real interest rates are negative (as they were in 2019 and early 2020)

• Recessions hurt the value of other investments (negative co-variance)

• Investors search for safety

• Central Banks print too much money (“The Fed can’t print gold”)

Conclusions 2

• The supply of new gold is finite – no new large mines in 10 years

• Royalty stream companies like FNV have outperformed bullion and the gold miner’s index

• One example of the benefit of active management

Poll Question 3

• Should gold constitute at least 5% of everyone’s portfolio today?

• 1. No

• 2. I’m on my way to the Royal Canadian Mint on Sussex Drive to load up the car

• 3. I’m still waiting to be convinced

Disclosure

• The presenter and/or his family hold the following units discussed in this presentation:

• FNV Franco Nevada

• XGD IShares Global Gold Miners ETF

• TLT IShares 20+ Year Treasury ETF

Questions ?

Facts versus Opinions

Gold Bullion versus S&P 500

Next Webinars

• October 7 Bonds and Preferred shares can still make money

• October 21 One Decision Investment Portfolios

• November 25 How to select a financial adviser