Weighing solid investment options
Seen as a good hedge against inflationary forces and volatility, gold demand for investment purposes tends to rise in turbulent times; for example, in 2020. istock.com
With interest rates and inflation on the rise and the threat of a recession not going away any time soon, Canadians feel uncertain about their financial future. A big question for many: Where and how should they invest their hard-earned dollars during these turbulent times?
Gold emerges consistently as a good hedge against inflationary forces and volatility, thanks to its tendency to rise in value when inflation is high and during periods of uncertainty. A December 2021 Forbes magazine article pointed to skyrocketing gold prices during the 2008 recession and in the midst of the pandemic-fuelled market crisis in 2020.
According to Natural Resources Canada, 2020 saw gold demand for investment purpose reach 47 per cent – an increase of 40 per cent from the previous year.
So what do Canadians need to keep in mind before putting their money in gold?
Alex Christopher, president of the Prospectors and Developers Association of Canada, says it’s important to know that, as is the case with most mining investments, there’s more than one path to gold investments.
“You can invest in a junior company through public offerings or a private placement, or in a bigger, more established company,” he explains. “You may also be able to buy flow-through shares.”
“You can invest in a junior company through public offerings or a private placement, or in a bigger, more established company. You may also be able to buy flow-through shares.”
In Canada, where gold is the most valuable mined commodity – with a production value of $12.3-billion in 2020, according to Natural Resources Canada – certain corporations in the resource sector are allowed to issue flow-through shares that, essentially, transfer eligible exploration and development expenses to their investors.
In return, these investors get tax deductions of potentially as much as 100 per cent of their original outlay in the year they bought their shares.They also get investment tax credits on the mining company’s resource expenses.
Investors who want to maximize the tax advantages from flow-through shares might also consider using these shares for charitable giving. This triggers an additional tax deduction of 100 per cent – basically a second tax write-off of the original investment when the shares are donated to a registered charity.
Flow-through shares can be purchased directly from a mining company or from a limited partnership that would typically invest in a portfolio of resource companies to provide some diversification.
“Flow-through shares have been an attractive source of capital for development-stage companies with projects in Canada,” says Michael Faralla, head of global mining investment banking at TD Securities. “At the same time, they offer investors the opportunity for a tax deduction and the potential to get a return on investment.”
Because mining is an inherently risky business, it’s important for investors to do their homework before investing their money. Ideally, they’ll want to invest in projects with high-quality deposits and that are backed by a strong management team, says Mr. Faralla.
For investors who don’t have the time or enough knowledge to research individual mining companies, an easier way to get into gold might be through an exchange-traded fund (ETF) or a mutual fund. Some of these funds might be backed exclusively by gold companies or by a mix of issuers engaged in exploring, mining and producing various precious metals and stones.
Of course, there’s also that centuries-old way of investing in gold: by buying the actual physical metal. Natural Resources Canada points out that investors today continue to buy gold in the form of wafers, bars and coins.
To buy these products, investors are advised to go to a registered bullion dealer. While storing physical gold can be a challenge, and could pose security risks, a big advantage is the relative speed and ease of liquidating these assets.
Whether acquired through direct shares, as part of a fund or in the tangible form of a bullion, wafer or coin, gold represents a solid investment – in good times and in bad.
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To view the full report as it appeared in The Globe's print edition: GOLD