Sprott Money

January 3, 2016

Gold outperforms Canadian stocks, bonds and real estate during 2015
The yellow metal is doing surprisingly well in Canadian dollar terms and is set to best all major local asset classes for the year.

Gold closed today at CDN $1,485.47 an ounce, up nearly 7% year-to-date in Canadian dollar terms. While there are three trading days left prior to yearend, the yellow metal is on track to outperform all major asset classes in Canada during 2015.

The benchmark Toronto Stock Exchange index, weighed down by a heavy commodities component, is down by more than to 10% on the year as these words are being written (Monday after the market close). Canadian government bonds paid next to nothing in interest during 2015, and extracted wealth from investors, when taxes and inflation are taken into account.

Gold even outperformed the frothy Canadian real estate market, which according to National Bank of Canada’s Teranet Index, was up by 6.1% in November compared to the same month the year before, driven by the red hot Vancouver and Toronto markets.

Local currencies matter
Gold prices, which trade in US dollars on world markets and which fell in US dollar terms during the year, were heavily influenced by the greenback’s strength during 2015. Investors were attracted by higher interest rates on US securities relative to European and Japanese issues, and the fact the fact that America remains the “cleanest dirty shirt,” in a rough global economy.

However buyers pay for their gold in local currency terms. That means if you live in Canada, what matters to you is not how much gold trades for in US dollars, but how much it trades for in loonies, which fell by nearly 20% against the greenback during the year. As a result Canadian investors who held onto gold during 2015 were able to preserve, and even to increase, their purchasing power. This despite the fact that the Canadian economy has been in a tailspin throughout the year.

Lessons for US and global investors
The key takeaway for global investors is that gold remains in a long-term battle with the US dollar. The fact that investors can’t buy euro bonds (but must buy them by individual country), and that the yuan is not yet ready for prime time, means that the greenback’s position as a global reserve currency remains secure for now. Yet while the yellow metal lost ground in greenback terms during 2015, its longer-term future is less clear.

With US five-year bond rates yielding 1.62% (EOD December 28th, 2015) and the Federal Reserve explicitly targeting 2% inflation, US government bond investors are almost guaranteed to lose purchasing power during the next half decade – even before taxes. With US stocks trading at historically high levels based on cyclically adjusted price earnings ratios, equities are unlikely to outperform either.

True, there are no guaranties as to how gold will perform during the coming years in US dollar terms. All we know for sure is that the current bear market comes on the heels of massive price increases in the yellow metal since the turn of the century. As a result, a significant correction was to be expected at some point. After what is now a four-year bear market, the chances of that correction ending soon have increased significantly.

In Canadian dollar terms, that process appears to have already have occurred.

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The views of the writer do not necessarily reflect those of Sprott Money News.

Peter (at) peterdiekmeyer.com


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