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IS IT REALLY ALL GOLD IF IT GLITTERS

One of the great honors of my life is serving as a Supreme Director of Knights of Columbus, which also means I am a member of our board of directors. One of the duties of a Supreme Director is to attend Knights of Columbus state conventions as a representative of the Order. This year, I represented the Order at the Connecticut and Tennessee conventions. While at the Connecticut convention, I spent some time with John Ruffo, our General Agent for Eastern Connecticut, and he told me one of his clients was asking if he should move all his money into gold.

For perspective, let’s look at gold’s performance data. Based upon the current gold contract, gold is up 21.9% from the recent low on October 5th through April 30th[1]. During this time, the S&P 500 returned 19.22%[1]. Gold can act as an inflation hedge and some people will use a gold ETF or own physical gold to provide that hedge for their portfolio. So, let’s discuss some practicalities.

Some people are of the mind that they should buy gold in case of a complete meltdown of the financial system. This is an interesting quandary, but let’s back up before the meltdown. If one owns physical gold, they will likely need to pay for storage and will also need to insure their gold. In fancy investment language, this is called “negative carry.” In other words, you need to pay “real” money to store and insure your gold, so those expenses need to be factored out of the actual return regenerated from holding gold. The other immediate issue is that you now have gold bars and a broken financial system. There are clearly logistics to finding someone to convert your gold into goods or services, and I am not exactly sure how one makes change if you show up with gold bars and coins. Gold is currently trading for a little over $2,305 per ounce, so if you went shopping and had one ounce gold coins as your smallest denomination, that could be a pretty expensive cart of groceries if your merchant does not have something smaller than one-ounce to make change[1].

It is not my intent to make light of a global financial calamity, but it is my intent to help people think through the practicalities of making certain investment decisions. Yes, having gold as part of a well-diversified portfolio is a strategy that many investors consider prudent because gold has acted as a hedge against inflation. At the same time, the concept of selling everything and moving all assets into gold or even cash is market timing, plain and simple. If you are going to time the market and buy gold because inflation is rising, you will need to have a plan to work yourself out of that position, because while inflation has typically been positively correlated to gold, it is typically negatively correlated to stocks. Once inflation and interest rates are on the decline, stocks will tend to rise and gold will tend to decline. So again, if you decide to rush into gold, you need to determine at what point you sell and reinvest in stocks. As I have often quipped, one of the only absolutes I have learned in an investment career that has spanned parts of 5 decades, is that I am smart enough to know that I am not smart enough to time the market!

[1] Source: Bloomberg

This commentary has been prepared by Knights of Columbus Asset Advisors (“KoCAA”) for informational purposes. Nothing contained herein should be construed as (i) an offer to sell or solicitation of an offer to buy any security or (ii) a recommendation as to the advisability of investing in, purchasing or selling any security. Any opinions and information expressed herein reflect our judgment and are subject to change without notice. Certain of the statements contained herein are statements of future expectations and other forward-looking statements that are based on management’s current views and assumptions and involve known and unknown risks and uncertainties that could cause actual results, performance or events to differ materially from those expressed or implied in such statements. Actual results, performance or events may differ materially from those in such statements due to, without limitation, (1) general economic conditions, (2) performance of financial markets, (3) interest rate levels, (4) increasing levels of loan defaults, (5) changes in laws and regulations, and (6) changes in the policies of governments and/or regulatory authorities.

KoCAA is an SEC registered investment adviser that maintains a principal place of business in the State of Connecticut. For information about KoCAA’s business operations, please consult the Firm’s Form ADV disclosure documents, the most recent versions of which are available on the SEC’s Investment Adviser Public Disclosure website at adviserinfo.sec.gov. KoCAA is a wholly owned subsidiary of Knights of Columbus, one of the world’s largest Catholic Lay Organizations. Investing involves risk and you may gain or lose money on your investments. For additional information visit KoCAA.com or write to kofcfunds@kofcassetadvisors.org.