Friday, February 2, 2018

A Canadian case for owning gold

I never invested a lot into gold. But over the last four or five years, I have become more involved.  Gold does many things for an investor. For example during Black Swan times gold often goes up; it is not ‘correlated to the stock market’. As such, gold maybe a a safer hedge than bonds against a stock market crash, although it has been observed that gold goes down during the initial crash. However, with the bull market in bonds coming to an end, I am afraid that bonds may not offer the protection during crashes that it used to provide.  In fact, combined with low interest rates, bonds have never attracted me, especially not on an after inflation and after tax basis. 
What if interest rates are high? Say 15%; yummy!  Well that only happens when inflation is high as well. So you have to look at REAL interest – which is usually between 2 and 4%.  So at 15%, you typically have 12 or 13% inflation. But that is not the worst of it; because you may be in a high tax bracket which many successful people are. I plan for success not failure!  So you have 15% interest and get taxed at a 50% rate; i.e. the government claws back 7.5% of the interest it paid you and then, after 12% inflation your return is? Right negative 4.5%.  Well success with that!  And don’t think that an RRSP helps, because when you take that interest out of the RRSP after many years you still pay top margin tax rates of 50% on everything you made!  Not to mention that any capital gains you may have made over the last 20 or 30 years of falling interest rates will NOT be taxed at half your tax rate (50%) as when you held it outside an RRSP, but you will get hit by the full 50% tax rate.
Thank you very much!  The only place bonds and other fixed income might work is in the TSFA but historically stocks do better so why bother? If you are in the mood of buying government bonds to guaranteed loss of money then go ahead.  That is why I love Kevin Leary’s view; he considers real estate part of the fixed income. Real Estate typically is 6 months or longer out-of-sync with the stock market and the economy (the latter two are not necessarily the same – that is why  having a career is a form of diversification!). Back to gold.
Gold is protection against fiat money failure and in case everything goes to ‘Hell in a handbasket’, gold has proven to be a valuable form of money.  Remember how many Jewish people used gold or jewelry as a way to get out of Germany and occupied Europe during World War II?  Gold has been a safe haven for more than 5000 years. Bitcoin may today be an potential alternative but I am far from sure about that. When I say ‘gold’, I include silver and to a much lesser degree platinum.
But here is another reason for investors to hold gold. Gold is a commodity and as such it is often inversely correlated to the U.S. dollar. Guess what happens with the value of a U.S. portfolio of stocks when the U.S. dollar falls?  Exactly, gold goes typically up and the portfolio in currency terms goes down.  Lots of people buy currency hedged ETFs but really if you own gold you are already protected. If, as Canadian you experience a rising Canadian dollar,  gold is there to offset the currency effect on your U.S. dollar net worth! So that would be another good reason to hold gold and I bet it is more predictable and reliable than bitcoin in a heart beat. "Oh, disaster Gold fell over the last 6 to 12 months from $1300 to $1200 dollar!"  Oops that is less than 8%.  Last year the Canadian dollar swung from U.S. $0,72 to U.S. $0.83 that is close to 15%!  I am sure you get my point.

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