Gold rally reflects something really wrong in global finance, why this dividend fund manager is holding cash, and the ETF domination

The price of gold and the total value of negative-yielding government debt have been highly correlated in recent years in a sign that something is very, very wrong in the world of finance.

Since early October 2018, the U.S. dollar amount of negative-yielding bonds has climbed from $5.7-trillion to just over $13-trillion. The price of gold jumped 18.6 per cent to US$1,423 for the same period. I posted a chart on social media showing a high degree of correlation for both measures from the beginning of 2016.

The entire concept of negative yields – buying a bond that locks in a loss to maturity – is absurd on its face. The Financial Times took a stab at explaining the phenomenon in a recent video after noting that the bulk of the money-losing instruments were German government issues.

The FT’s Brooke Fox explained (behind their paywall) that the European Central Bank charges its members 0.4 per cent to hold deposits, so European banks are better off buying bonds yielding negative 0.2 per cent. A desperate investor need for safety and liquidity was listed as the second reason, and third, the ECB signalled it may renew open market asset purchases, offering the possibility of capital gains.

The consequences of all this have gotten truly nutty. The FT’s Alphaville site (not paywalled, but registration required) described a 100-year Austrian bond issue with a positive yield that is nonetheless lower than the country’s historic inflation level as one where “if you hold to maturity, there are no number of lifetimes in which you recoup your initial capital.”

The fastest way to make an economics professor run away screaming is to ask, “What is money?” so I don’t want to go too far down the road of discussing the monetary properties of the shiny metal. I will note there has always been a small, fervent group of investors who haven’t trusted the value of government-issued currency since it was all exchangeable for a specific amount of physical gold.

I have been a gold agnostic – occasionally concerned about the effects of monetary expansion but not convinced that hoards of a largely useless metal are the correct way to gauge excesses. It is also the case that rapidly falling global bond yields indicate that demand for debt issues is currently exceeding supply. The problem with bond prices might not be too much government debt but not enough.

That said, it is not surprising that global investors faced with obvious financial aberrations, and strong indications of more unconventional monetary policy ahead, are increasingly opting for the traditional wealth-preserving vehicle of gold.

-- Scott Barlow, Globe and Mail market strategist

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Stocks to ponder

TFI International Inc. (TFII-T). This mid-cap stock is nearing oversold territory and appears on the negative breakouts list (stocks with negative price momentum). It has come under pressure in recent weeks due to rising concerns of an economic slowdown. However, operationally, management is delivering strong results, reporting better-than-expected earnings last quarter, in spite of harsh winter weather conditions. The stock has a current yield of 2.4 per cent with a quarterly dividend that has steadily grown over the years. Montreal-based TFI International is a trucking company with operations in Canada, the U.S., and Mexico. The company is a market leader with the largest trucking fleet in Canada. Jennifer Dowty reports (for subscribers).

Questor Technology Inc. (QST-X). This stock has positive price momentum with its share price advancing 49 per cent year-to-date. However, the stock has not appeared on the positive breakouts list as its market capitalization (currently at $135-million) is below the $200-million screening threshold. The stock has strong top-line growth and earnings growth and a strong balance sheet. The share price can be quite volatile. Consequently, this stock may be best suited for consideration by investors with a high risk tolerance. Calgary-based Questor serves companies in the oil and gas industry, providing waste gas incineration systems that enables companies to meet legislated emission limits. Jennifer Dowty reports (for subscribers).

The Rundown

If you’re feeling bold, here’s a chance to get into a top fund in a risky sector

An opportunity has opened to get some of the smartest high-yield-bond fund managers in the country working on your portfolio. The PH&N High Yield Bond Fund reopens for new investors on Thursday after being capped for new clients back in April, 2016. The fund won’t likely be open to new investors for long, and therein lies a dilemma: PH&N High Yield Bond is one of the best names in its category, but now seems a less than ideal time to start shovelling money into high-yield bonds. Rob Carrick reports (for subscribers).

This dividend fund manager has doubled the return of the TSX over the past five years. Here’s what he’s buying and selling

Prakash Chaudhari is holding a lot of cash right now, but the portfolio manager says it’s not a preventive move in the event of a market downturn. “We don’t concern ourselves with trying to forecast an economic downturn,” says Mr. Chaudhari, managing director and senior portfolio manager at Manulife Investment Management. Instead, he prepares his fund to be resilient. Mr. Chaudhari and his team oversee more than $22-billion in assets across six mutual funds and other institutional mandates. He’s the lead manager of the $1.8-billion Manulife Dividend Income Plus fund. The F series of this fund, generally available from fee-based advisers, has returned 19.3 per cent year-to-date, as of May 31, and 6.5 per cent over the past year. Brenda Bouw reports (for subscribers).

The rise of ETFs is making life miserable for Canada’s mutual fund industry

Canadian mutual-fund sales will never again outsell Canadian exchange-traded funds in a single year, according to Matt Hougan, chairman of Inside ETFs. The bold prediction was made last week during the Inside ETFs Canada conference in Montreal, as Mr. Hougan discussed the growth of the Canadian ETF market in comparison with the United States. Last year, ETFs outsold mutual funds in Canada for the first time in a decade. And nearly halfway through 2019, ETFs are on target to outsell mutual funds again. Clare O’Hara reports.

How the surge in TSX share buybacks could affect your portfolio returns

Cash-rich Canadian companies are not investing in new plants and equipment to improve productivity or expand output, a recent article in the Report on Business noted. Instead, they are using excess cash to buy back their own shares. Almost $50-billion has been devoted to buybacks in the 12 months that ended in March, which is 50 per cent higher than the previous peak a decade ago. Robert Tattersall explains why this hasn’t necessarily meant a big boost to Canadian portfolios.

Others (for subscribers)

How investors can benefit from ‘midyear mayhem’ in commodity markets

Four high-flying U.S. stocks that may be about to flame out (and only one is a tech stock)

Ten undervalued Canadian stocks with lower volatility

Why Goldman thinks nickel is trading like a biotech start-up

Bitcoin reaches 18-month high as Facebook’s Libra spurs interest

Wednesday’s Insider Report: Executive is buying this dividend stock that’s rallied over 40%

Wednesday’s analyst upgrades and downgrades

Wednesday’s small-cap stocks to watch

Tuesday’s Insider Report: Executive from this Big 5 bank pockets nearly $1-million

Tuesday’s analyst upgrades and downgrades

Others (for everyone)

When home bias is acceptable in your portfolio

Investors with $34-trillion demand urgent climate change action

Iceland index inclusion leaves fund managers cold

Globe Advisor

Six ways to play the emerging U.S. cannabis industry

New dealers cropping up in the mutual fund space

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Ask Globe Investor

Question: We are retired and manage our own investments through an online brokerage investment service with one of the major banks. For the most part we have been quite successful and feel we have enough knowledge to continue to do so. We do find we are missing out on some opportunities, though, and would like to understand our options.

We receive email alerts of “new issues” but have found that any of the better options (for example, two Canadian bank rate reset preferred share options that were issued recently) were closed before we could even get online to make a purchase. I can recall someone referring to these announcements as “tombstones” by the time they reach the consumer, and it seems they are correct. Are we limited to using a broker and paying a management fee on all of our funds in order to gain access to such services? This seems counterintuitive, as any gains we would make in this case would be consumed by fees.

Answer: Unfortunately, do-it-yourself investors are usually left out in the cold when it comes to initial public offerings (IPOs), especially hot ones. The underwriters allocate the shares to brokers, with preference given to those within their own firms. The brokers in turn offer positions to their clients. If the new issue is in demand, the allocation is usually rationed and only the best customers get a chance to buy in. The only time a DIY investor might get a crack at an IPO is if the issue fails to sell out quickly. That usually means it’s a dud and you don’t want it anyway.

You can advise your online broker of your interest in new IPOs but don’t expect much to happen. If you really want to participate you would need to open an account with an active adviser, preferably at a firm that does a lot of underwriting. RBC Dominion Securities and CIBC Wood Gundy are two examples.

– Gordon Pape

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What’s up in the days ahead

If you’re concerned about Bombardier Inc.’s high level of debt, you might not take much comfort from the company’s deal to sell its money-losing regional jet program to Mitsubishi Heavy Industries Ltd: Bombardier’s balance sheet will improve, but only by a smidgen – and at a time when economic clouds are gathering. David Berman will explain.

Click here to see the Globe Investor earnings and economic news calendar.

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Compiled by Gillian Livingston