Long Position - Gold

Asset Overview

The Gold Bullion Fund (TSX: KILO), managed by Purpose Investments, provides investors with direct exposure to physical gold bullion. Purpose Investments, founded in 2012, is a Canadian asset manager with over $14 billion in assets under management as of 2021. The fund holds fully allocated, one-kilogram gold bars with unique identifiers, securely stored at the Royal Canadian Mint in Canada and subject to regular audits.

Investors holding denominations of one kilogram or more are eligible for in-kind redemption, allowing physical delivery of gold bullion. This structure offers transparency, physical ownership, and minimal counterparty risk relative to synthetic or derivative-based gold exposure.

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Investment Rationale

Critical Role in the Global Economy

Although gold no longer backs fiat currencies following the collapse of the Bretton Woods system in 1971, it remains a core asset on central bank balance sheets. As of 2023, central banks and financial institutions hold nearly one-fifth of the world’s above-ground gold supply. Recent accumulation by central banks—such as Hungary tripling its gold reserves to 94.5 tonnes—signals continued institutional reliance on gold as a store of value amid inflationary risk, rising government debt, and macroeconomic uncertainty.

Store of Value and Inflation Hedge

Gold has preserved purchasing power over centuries, serving as a long-term hedge against inflation and currency debasement. Historically, gold prices have risen during periods of elevated inflation and declining real interest rates. In the early 1970s, gold traded at approximately $35 per ounce; as of January 2024, gold prices exceeded $2,000 per ounce. This long-term appreciation reflects gold’s ability to maintain real value as fiat currencies lose purchasing power.

Geopolitical and Macroeconomic Uncertainty

Gold consistently performs well during periods of geopolitical stress and declining confidence in governments and financial systems. Rising global tensions—including conflicts in Eastern Europe and the Middle East, as well as U.S.–China relations—have reinforced gold’s role as a safe-haven asset. During such periods, gold often outperforms traditional risk assets.

Increasing Demand and Supply Constraints

Structural demand for gold remains strong, particularly in China and India, where gold plays an important cultural and religious role. At the same time, investment demand through gold ETFs has increased globally. On the supply side, global gold production has declined since 2000, central bank gold sales have slowed materially since 2008, and new mine development requires five to ten years. Constrained supply dynamics support long-term price appreciation.

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Summary

Gold is a low-risk, defensive asset that plays a critical role in portfolio diversification. While it does not generate income and may exhibit short-term volatility, gold has historically preserved value over long horizons. Its negative or low correlation with equities and bonds makes it particularly valuable during periods of financial stress, inflation, and currency depreciation. As macroeconomic uncertainty persists into 2024, gold remains a compelling hedge and stabilizing portfolio component.

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Valuation and Market Outlook

Gold prices surged in late 2023, reaching a record high of $2,135.39 per ounce, driven by central bank purchases, geopolitical tensions, a weakening U.S. dollar, and expectations of Federal Reserve rate cuts. The 52-week trading range spans approximately $1,982 to $2,135 per ounce.

As inflation moderated from its mid-2022 peak, gold prices stabilized near $2,000 per ounce, prompting expectations of further upside as real interest rates decline. Lower nominal rates and a weaker U.S. dollar increase the attractiveness of non-yielding assets such as gold.

J.P. Morgan projects gold prices could reach $2,300 per ounce in 2025, assuming a cumulative 125 basis points of Federal Reserve rate cuts beginning in mid-2024. This forecast is contingent on slowing U.S. economic growth and moderating core inflation, consistent with current Federal Reserve projections.

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Risks and Catalysts

Key Risks

• Price Volatility:
  Gold prices can experience significant short-term fluctuations driven by macroeconomic data, monetary policy expectations, and investor sentiment.

• Macroeconomic Sensitivity:
  Rising interest rates or a strengthening U.S. dollar can reduce the relative attractiveness of gold, as it does not generate yield.

• Inflation Risk:
  While gold is generally viewed as an inflation hedge, there have been historical periods where gold underperformed inflation, particularly during the 1980s and 1990s.

• Political and Policy Risk:
  Elections, trade policy shifts, and geopolitical developments can introduce volatility into gold markets.

Potential Catalysts

• Federal Reserve Rate Cuts:
  Declining real interest rates historically support higher gold prices.

• Central Bank Accumulation:
  Continued gold purchases by central banks strengthen long-term demand.

• Geopolitical Escalation:
  Heightened global uncertainty increases safe-haven demand for bullion.

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Conclusion

Gold bullion remains a core long-term asset for portfolio diversification, particularly in periods of elevated macroeconomic and geopolitical uncertainty. The Gold Bullion Fund (TSX: KILO) offers transparent, physically backed exposure to gold with minimal counterparty risk. While investors should remain mindful of price volatility and macro sensitivity, gold’s historical role as a store of value and hedge against inflation and currency erosion supports its inclusion in diversified portfolios.