In an increasingly complex world, the Financial Post should be the first place you look for answers. Our FP Answers initiative puts readers in the driver’s seat: you submit questions and our reporters find answers not just for you, but for all our readers. Today, we answer a question from Irene about haven investments.

Q. My name is Irene and I am 83 years old. I have some investments in guaranteed investment certificates (GICs) and some stocks but also in bitcoin and gold royalty exchange-traded funds (ETFs), which have done very well. They are supposed to be a hedge against a financial crash and devaluation of the dollar. My question is whether they really are a hedge since they are denominated in a currency. I do not want, and don’t know how, to invest in physical bitcoins and am not sure whether physical gold is safe when stored at a bullion dealer. Your suggestions will be appreciated.

— Irene G . FP Answers: Irene, your question comes up often. To clarify, when you say “gold royalty ETFs” I presume that means ETFs that invest in gold-producing companies.

  • Gold royalty ETFs, which buy the companies that produce the yellow metal. These are generally rated as high-risk products because the marginal cost of production is relatively stable, so investors can make outsized profits (and incur outsized losses) depending on the price of the underlying commodity. I have used this format in the past.
  • Gold bullion ETFs, which are available in either hedged or unhedged formats and which simply track the price of gold. Your concern about currency denomination can be at least somewhat addressed here. These are generally rated as medium risk products because the leverage impact noted above does not come into play. I use this format in my practice currently because the risk rating makes it suitable for just about everyone and I want everyone to have at least some exposure.
  • Directly held bullion. This has no management expense ratio (MER) or performance drag but has its own challenges such as safe storage and security. It is an old-school option that is favoured by ultra-traditionalists and conspiracy theorists. I do not recommend it, personally.

Let’s begin with the practical investing options. There can be no doubt that gold has traditionally played a role as an inflation hedge, and as a hedge against real and perceived insurrection and insecurity. There is no compelling reason for why this is the case, other than to say that “it works because people think it works.” There’s an element of groupthink that supports the price of gold, since it does nothing to generate an income and has no commercial purpose. Stated a bit differently, I, like many, think gold is suitable for almost anyone in general and in this environment in particular despite there being no traditional investment thesis to support its value. My view is that a five per cent to 10 per cent stake is appropriate for almost any portfolio when aiming to optimize risk adjusted returns.

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The story with bitcoin is more or less the same as with gold. Cryptocurrencies have no real underlying value based on investment merit, but are nonetheless perceived as having value. As long as the perception is accepted, bitcoin and other similar offerings will be seen as a hedge against market crashes. Note that I said “seen as.” The perception of value seems to be real and the thesis works — until it doesn’t. We’ve never had a genuine market crash when large amounts of people held cryptocurrencies. No one really knows what to expect. The difference between theory and practice is that in theory there is no difference, but in practice, there is.

John De Goey is a portfolio manager with Designed Securities, regulated by the Canadian Investment Regulatory Organization and a member of the Canadian Investor Protection Fund.