Give me interest rates or give me gold
This Canadian investor wants to see interest rates go up before our income investments become worthless and we have to buy more gold.
The Federal Reserve Board held the line on interest rates yesterday.
Oft-quoted Canadian analyst Mr. David Rosenberg of Gluskin Sheff suggests that the Bank of Canada should keep in step with the Fed.
The economic recovery is still too fragile to start tightening up rates, in his opinion.
But not everyone agrees.
“It is time for the government to raise interest rates,” proclaims Mr. T.J. Gardiner in Investor's Digest of Canada.
This Ottawa investor, a Bell Canada retiree, is one of many who are fed up with the piddling returns on income investments.
And he’s not going to take it anymore. He’s going to buy more gold.
He also thinks the policy of low interest rates may have outlived its usefulness.
We’ll take his objections one by one, and see precisely what he plans to do if the Bank of Canada doesn’t make those rates rise.
Victim of the carry trade
“No I do not think the economy is in danger of overheating,” says Mr. Gardiner. “And yes I realize the recovery is fragile and raising rates too much or too quickly could tip us back into a recession.”
But they’re just too low, he insists. Interest rates cannot be sustained at these bottom-scraping levels indefinitely. Matters could get out of hand.
For one thing, North America (the U.S. primarily, but also Canada) could become the latest victim of the “carry trade.” People would flock in to borrow money at ridiculously low rates before scurrying off to invest it in more profitable places like China or India.
Japan has been the object of the carry trade’s attention for two decades. “As a result, its economy is even more of a mess than the rest of the developed world,” says this analyst.
If Japan raised interest rates today, it would have to print massive amounts of money just to pay the interest on its national debt. Inflation would explode.
Let’s not follow this example, says Mr. Gardiner.
Below sea level
Meanwhile, on the home front Tax-Free Savings Accounts have been trading at a “measly” one per cent. The rates on bonus savings accounts are even lower.
Logically, returns on taxable accounts should be higher than those on tax-free accounts. No such luck. (And never mind the fact that the bonus savings account Mr. Gardiner opened in the 1990s came with the solemn promise that its return would never fall below 2 per cent.)
Five-year GICs are at 2 per cent, which is practically below sea level for these investments. “At these rates, you might as well put your money under your mattress.”
And this isn’t just grumbling. “People have no incentive to save or invest, which is what we need if the recovery is to last,” says the analyst. “I know that lower rates are intended to stimulate spending, but spending money that doesn’t exist is not a good idea.”
Money could start to drain out of the system, for want of a place to go.
20 per cent in gold
“Don’t get me wrong,” says Mr. Gardiner. “I’m not one of those gold bugs who thinks everything is going to hell and we should liquidate all our holdings and sink the proceeds into the precious metal.”
But gold and silver are starting to look a lot more attractive under the circumstances, he says. The opportunity cost (that is, what you lose by passing up another course of action) is virtually zero.
Careful investors will not put large parts of their portfolios into gold, he adds. But they may shift much of their cash reserves — perhaps as much as 20 per cent — into it. This is money that is lost to the economy.
Lower rates have already had their stimulating effect, this observer claims. The housing market has recovered, consumers are spending more and banks are working around low interest rates to parcel out loans.
In short, we may have reached the point of diminishing returns beyond which low rates will take more out of the system than they will put in.
Mr. Gardiner already has “a bit of money” in gold, through the Central Fund of Canada (TSX-CEF.A), which is trading at $14.33. But it is not even close to 5 per cent, let alone 20 per cent.
He is not interested in paying the storekeeping costs for gold bars and gold coins, he adds, “and I’m not expecting a total collapse of law and order like the survivalists.” Nor is he going to talk about gold stocks, which belong in another part of an investor’s portfolio.
But owning gold through the previously mentioned Central Fund or another such as Claymore Gold Bullion ETF (TSX-CGL) is something Mr. Gardiner strongly recommends. Claymore trades at $10.17.
“I see gold simply as an insurance policy and a place to park some of my cash reserves when interest rates are as ridiculously low as they are now,” he tells his Investor's Digest of Canada readers.
And he concludes: “I suspect most cautious investors will be doing the same thing, at least until the government sees the light and has no choice but to raise interest rates.”
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