Gold: Three Charts On Growth

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Gold is an important asset class to own by most investors. It does not produce a steady stream of regular income such as dividends and the only gain one can expect is due to price appreciation. So it is a great asset for investors seeking income. However gold has its advantages. For example, during times of global market chaos, recessions, etc. gold can offer some stability to a well-diversified portfolio as investors flee risky assets for the safety of treasuries and gold. Generally investors can allocate a small portion of their total assets to growth. How much one should allocate depends on age and other individual factors.

a) Gold great to hold during the global financial crisis of 2008-09 and the dot com bubble as the chart shows below. From 2000 to August this year, Gold has produced an average annual growth of 9% compared to about 2% for the S&P 500:

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Gold Average Growth Rate

Source: Gold: Glittering no more, CIBC World Markets

From the CIBC report:

However, as a store of value since the turn of the millennium, gold is still performing better than others. An investment in gold made in 2000 has enjoyed a 9% compound growth rate. Of course, if that investment was cashed in in 2011, when gold prices peaked, the annual growth rate would have been much higher. But that 9% is still much healthier than the gains made by investments in the S&P 500 Index, or in the US housing market at that same time (Chart 1)

b) Despite huge run-up during the financial crisis, gold has never reached its inflation adjusted peak reached in 1980.

GOLD chart with inflation

Note: Chart data above is as of April 2015.

Source: Gold Is Near an All-Time Inflation-Adjusted Low, Casey Research

Here is another excerpt from a recent article on WSJ:

To understand the stock market, check out the gold market. The two tell a lot about each other.

People buy gold when they are afraid of the future. They buy stocks at the opposite time, when they are hopeful. Today, despite worries about China, Greece, a likely Federal Reserve interest-rate increase and an uncertain corporate-earnings outlook, the gold market is giving a clear signal: Investors, on the whole, aren’t very frightened.

The last time gold hit a record, after controlling for inflation, was 1980. It has never been back in inflation-adjusted terms and, at Friday’s close, was 57% below its 1980 peak. The Dow Jones Industrial Average, also adjusted for inflation, last hit a record on May 19. At Friday’s close it was 3.7% off that level.

Investors are nervous enough that they aren’t pushing stocks to new records, but not nervous enough to sell heavily or buy gold.

“We view gold as an Armageddon-scenario asset,” explained Jim McDonald, chief investment strategist at Northern Trust Corp., which oversees $946 billion in Chicago. Such a scenario isn’t among his concerns today.

For reference, New York gold futures peaked at $825.50 a troy ounce on Jan. 21, 1980, which in today’s dollars is about $2,532.08.

Source: Investors Are Far From Sold on Gold, The Wall Street Journal

c) The following chart shows gold shot up during the global financial crisis and was one of the few places to hide.

gold



Source: If the Bear’s Near, Which Assets Protect You, WSJ

Dividend Withholding Tax Rates By Country 2015

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*** UPDATE:  For the latest Dividend Withholding Tax Rates click :

Dividend Withholding Tax Rates By Country 2022

Dividend Withholding Tax Rates is an important to consider when investing in foreign stocks for US-based investors. These taxes vary by country and can be as high as 25% or more or as low as 0%.

The following table shows the dividend withholding tax rates for 2015:

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Dividend withholding taxe rates 2015

Source: NYSE

Here are two points to consider:

  • Though the rate for Canada is noted as 25% above, it is actually possible to get a reduced rate of 15% for taxable accounts by filling a form with the tax authority of Canada. Also Canada does NOT deduct withholding taxes from dividends of stocks held in retirement accounts such as IRAs, 401Ks, etc. Hence it is a smart move to hold Canadian dividends stocks in retirement accounts.
  • A few countries such as UK, Malaysia, Singapore, India, etc. do NOT charge any dividend taxes for all types of accounts. Investors hunting for income stocks can focus on these countries although Indian stocks are not known for high dividends.

To save for future reference: Download the above table in a pdf document.

*** UPDATE:  For the latest Dividend Withholding Tax Rates click :

Related:

Donation for Wiped Out Shareholders of City of Glasgow Bank in 1878

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The The collapse of the City of Glasgow Bank (CGB) collapsed in October 1878. Before the recent financial crisis, it was the largest commercial banking failure in the United Kingdom.

When the bank collapsed shareholders were wiped out. In those days, the public helped out these investors by collecting donations. This is unthinkable today….

Here is a receipt for a donation made by someone:

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City of glasgow bank shareholders donation

From a research report on CGB’s failure by the Bank of England:

The suffering and financial burden placed on shareholders was widely covered in the press. Coverage typically portrayed the shareholders as socially vulnerable and financially ruined investors, with small shareholdings.The public were reported as viewing the failure of CGB and the impact on its shareholders as a national tragedy. Public sympathy led to fund-raising events for CGB shareholders, including the establishment of a relief fund, which received £379,670 in donations by 1882, and even a public recital of the works of Shakespeare.

Source: Desperate adventurers and men of straw: the failure of City of Glasgow Bank and its enduring impact on the UK banking system, Bank of England

On The Correlation Between Chinese Stock Market Performance And Economic Growth

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The Shanghai Composite Index is basically flat year-to-date.After a strong run up Chinese equities plunged heavily a few weeks ago. Now they appear to have stabilized due to meddling in the market by the state.

Though much of the media has focused on the Chinese equity market and the economy, the reality is that the stock market in China is small when compared to other countries. For example, the stock market capitalization of all the listed firms as a percentage of the GDP in China is smaller than in the US and Canada. Hence the spillover effect due to the fall in equity prices on China’s real economy will be small. In addition, Chinese households hold only a small portion of their financial assets in stocks compared to Americans.

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China Stock Market as a percentage of GDP

In general, there is very low relationship between a country’s economic growth and equity market growth. In China also the stock market is not a leading indicator of economic growth and vice versa.From last year thru the peak this year Chinese equities soared while the underlying economy barely experienced growth.

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China Stocks Growth vs Economic Growth

From a CIBC research report:

During the late 1990’s and early 2000’s the market’s performance seemed almost inversely correlated with the economy’s growth. Around the time of the financial crisis, the relationship between these two variables seemed to grow stronger. However, the recent run-up and crash appears to prove that that correlation was tenuous at best and points to the weak predictive power of Chinese equities.

Source: China’s Irrational Exuberance by Royce Mendes, CIBC World Markets, Aug 11, 2015

Frontier Markets Have Low Correlation To Emerging Markets

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In recent weeks, emerging markets such as the BRICs have become more like submerging markets. One way investors can diversify their portfolios is to consider including equities from frontier markets. However frontier stocks are not for the faint of heart. These markets tend to highly volatile and can decline sharply for a variety of reasons including liquidity and political upheavals. For example, during the Egypt political crisis a few years ago, the market was shutdown for many months and stocks plunged by over 75%. As mentioned earlier such huge losses cannot be borne for most retail investors. However for those willing to take the risk, frontier markets such as Egypt, Pakistan, Nigeria, etc. offer some potential advantages such as the low correlation to emerging and developed markets.

From an article by Franklin Adatsi in Money Observer:

In an era of rising systemic risks, the attractions of an emerging markets portfolio can be enhanced by diversifying the potential sources of alpha, and adding frontier exposure can be one way to go about this.

With low correlation to each other and to emerging markets (as shown by the table below, click to enlarge), frontier markets can help diversify country risk, a major risk factor for emerging market portfolios.

China, South Korea and Taiwan make up 50 per cent of the MSCI Emerging Markets Index and key non-Asian markets such as Brazil, Russia and Indonesia tend to be highly correlated with China and the emerging markets index.

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Frontier markets

With the concentration of country risk and the high correlation between major emerging market country stock indices, seemingly isolated economic events in one country can create knock-on effects that can be felt more widely. Frontier markets, do of course, carry considerable risk, but crucially these tend to be more country specific.

Source: Frontier markets: what’s in a name?, Money Observer, Sept 7, 2015

For example, Saudi Arabia has just 1% correlation with the S&P 500 and a negative correlation with emerging markets.

Investors that have the risk tolerance to invest in frontier markets should consider ETFs rather individual stocks.The iShares MSCI Frontier 100 (FM) ETF contains the top 100 companies from these markets and provides a simple way to access them.

Disclosure: No Positions