I am not a gold bug.
But I have been around gold bugs and gold market enthusiasts for more than 30 years. From Doug Casey of Crisis Investing fame, to Adrian Day of Global Analyst and of course the godfather of gold investing in the U.S. — Jim Blanchard. Jim Blanchard fought for years to legalize the ownership of gold for Americans and eventually worked with President Richard Nixon to accomplish the feat back in the 1970s.
And I’ve also been friends with geologists and mining experts including Rick Rule, the CEO of Sprott’s (OTCMKTS:SPOXF) U.S. holdings.
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Then on the investment fund front there was Ian McAvity, who was on the board and directed Central Fund, now Sprott Physical Gold and Silver Trust (NYSEMKT:CEF).
But up until June of last year, I had never recommended a gold investment. And now, I remain in my recommendation to buy and own gold — but in a very specific way.
Gold can be an emotional investment. Many folks have a want or need to own it as for them it is a better store of value than fiat currencies including the U.S. dollar. And those same investors will also view it as an inflation hedge. Still, others see it as an absolute asset to have for when the financial Armageddon strikes.
But I see gold differently. Gold to me is valued on some of the just-mentioned rationales — but it is more accurately priced based on more specific economic and market conditions.
Interest Rates and Gold
Interest rates are one of the biggest drivers for gold. Gold in and of itself does not earn a dime in interest or dividends. So, by buying and holding it you are incurring an important cost in opportunity lost in interest.
So, as interest rates in the U.S. rise, gold will tend to suffer as the pain of the lost opportunity of earning more interest drives away buyers. And in turn, when interest rates are low and falling, then the opportunity cost of holding gold drops and the demand to own it rises.
Look at the following graph that plots the price of gold and short-term U.S. dollar interest rates for the trailing year. Three-month London Interbank Offer Rate (LIBOR) is plotted in white and the spot price for gold is fittingly in gold.
Source: Chart by Bloomberg
Total Return Franco-Nevada (White) and SPDR Gold Shares (Red)
And Franco-Nevada continues to outperform gold and the GLD ETF. Since I recommended the shares in June to date, Franco-Nevada has returned 40.6% including dividends compared to the return of GLD of only 15.4%.
So, if I’m going to recommend gold, I’m staying for now with Franco-Nevada for my Profitable Investing subscribers. And note, as a foreign company it should be held in a taxable account. Canada for now doesn’t withhold taxes for individual investors with qualified retirement accounts. But that could change as Ottawa has a history of quick and severe tax policy changes. And withholding taxes are generally easy to reconcile for taxable accounts, but for tax-free retirement accounts it does get harder. I err on the side of caution.
Neil George was once an all-star bond trader, but now he works morning and night to steer readers away from traps — and into safe, top-performing income investments. Neil’s new income program is a cash-generating machine … one that can help you collect $208 every day the market’s open. Neil does not have any holdings in the securities mentioned above.
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