I received an email last week from a reader asking about the best way to hold gold right now. "I am one of those investors who is not confident that the market system is all that healthy right now," he wrote. "I think we are poised for another 2008 debacle."
I understand his concern. There's a high level of uncertainty around right now, as I have noted in previous columns. Among the issues unsettling investors are:
Grexit. The new Greek government has been digging in its heels against any continuation of the austerity program that was imposed on it by the European Union (read Germany) as a condition of its bailout package. A collapse in the negotiations could have serious consequences. They include a credit default that could hit some European banks especially hard and a decision to drop the euro and reintroduce the drachma as Greece's official currency. In itself, Greece's departure wouldn't sink the euro but if other indebted countries follow suit, the currency could be doomed. But we aren't at a crisis stage yet and there was hope on Friday that a deal could be worked out.
Ukraine. A new ceasefire is supposed to come into effect this weekend but no one seems very confident it will be any more successful than the last attempt. The possibility that Washington could approve the sale of defensive weapons to Ukraine has raised the stakes. France and Germany oppose the idea and Secretary of State John Kerry says the U.S. does not want to get into a proxy war with Russia. But if the new ceasefire doesn't hold, pressure to arm the Kiev government will build in Washington. Then there's the risk of more and tougher sanctions, which appear to be hurting Europe's economy almost as much as they are hurting Russia. The whole mess is a lose-lose situation for just about everyone except Mr. Putin, whose tough stand is winning him popularity points at home.
China. The economic news from China continues to cause concern. The country is growing at its slowest rate in 20 years and inflation is at a five-year low. China's central bank has resorted to its own version of quantitative easing over the past two months. According to The Wall Street Journal, last week it pumped the equivalent of US$7.2 billion into the money market in a move to increase liquidity. Meanwhile, the government has eased restrictions on the amount of cash reserves banks must maintain in an effort to encourage lending. These moves suggest the Chinese government is alarmed about the trends it is seeing. Given the huge role China has played in world economic growth in recent years, the rest of us should be worried too.
The U.S. dollar. As always happens in times of uncertainty, offshore money has been flooding into the perceived safe haven of the U.S. dollar. This has driven the greenback to its highest level ever against the euro. Other currencies, including the Canadian dollar, have also lost significant value. The fallout from the strong greenback is already affecting companies with large overseas operations. Google recently reported that its fourth-quarter revenue was off by $541 million because of the high greenback and medical devices manufacturer Stryker faces the same problem (see updates). Other multinationals are in a similar position. Meantime, U.S. exporters are starting to complain because their goods and services have become more expensive in global markets. All of this leads to concerns that the American economy, which is the only one in robust condition right now, could falter.
I don't wish to minimalize any of these problems. Each has the potential of causing major headaches for investors. That said, I don't think we're at the danger level of 2007-08. There are a lot of positives to offset the concerns I outlined.
For starters, financial institutions appear to be in better shape now than they were in 2007-08 and regulators are more on top of the issues. While it's true that central banks don't have as many weapons available as they did then, with most interest rates near rock bottom, they are finding new ways to stimulate economies, such as Europe's venture into quantitative easing.
Another encouraging sign is that we finally seem to be finding some stability in the oil market. The price of West Texas Intermediate seems to be settling between US$50 and US$55 a barrel for now, and there is less talk of a plunge to US$40.
Plus we got some encouraging economic news from Europe on Friday with better than expected growth reported in the final quarter of 2014. Germany led the way with a gain of 0.7%. That may not seem impressive but it was well ahead of estimates of 0.3%.
It all adds up to a conclusion that while we have serious problems to deal with, we don't appear to be heading towards a cliff.
That's why, to bring this back to the reader's query, I don't see a strong likelihood of a big run-up in gold this year. That explains why I advised selling BMG BullionFund last week. In a rising precious metals market, it would be worth holding despite its high MER. But in this situation, it has become a drain on assets.
Anyone who feels the need to hold gold as an insurance policy against a global financial collapse should consider an exchange-traded fund because of the low cost involved. The most popular, by far, is the SPDR Gold Trust (NYSE: GLD), which has more than US$30 billion in assets under management and is a pure play on bullion. It has a management expense ratio of just 0.4%. You can find a list of other U.S.-based gold ETFs at http://etfdb.com/type/commodity/precious-metals/gold-etf/. But be cautious. Some of them track stocks, not the metal, while others are leveraged plays.
If you prefer a Canadian ETF, look at MINT Gold Reserves (TSX: MNT). It is an investment in the gold reserves held by the Royal Canadian Mint and carries a low MER of 0.35%.
If you go the ETF route, at least it won't cost you a lot of money if the gold price doesn't go up.
