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investor clinic

I constantly hear ads on the radio suggesting that investors should buy gold, especially in uncertain times. What do you think is a prudent amount of gold to own in a portfolio?

I’m not a fan of gold, for a couple of reasons.

First, it generates no cash flow, which makes it inherently speculative. The only way to make money on gold is to sell it to a “greater fool” who will pay you more for it. While you’re holding your bullion – and possibly paying storage and insurance fees – gold pays you nothing, unlike a dividend stock that sends you cash every quarter out of the company’s earnings.

Second, gold has been a lousy long-term performer. For the 10 years ended Jan. 20, the price per ounce rose about 10.6 per cent in U.S. dollars, or just 1 per cent on a compound annual basis. After adjusting for inflation, gold’s real value has fallen over that period. In fact, it’s lower today than it was back in 1980.

Gold’s supposed value as an inflation hedge and safe haven in times of turmoil are common reasons people cite for buying it. But the facts tell another story. Even during a pandemic, and with the U.S. economy currently experiencing its highest inflation rates in 40 years, the price of gold has basically flatlined over the past 12 months.

Yes, there have been periods when gold has shined. Anyone can spot these rallies in hindsight by looking at a gold price chart. But good luck identifying them ahead of time. The same goes for “investing” in bitcoin or any of the myriad other cryptocurrencies that are now being hawked on TV commercials during hockey games, alongside – not coincidentally – ads for sports betting sites.

Like gold, cryptocurrencies have no fundamental intrinsic value, generate no cash flow and don’t give the buyer a claim on any earnings. They’re also wildly volatile. Since peaking in November, bitcoin has lost more than a third of its value.

For my money, I would much rather own shares of a company that generates growing revenues, profits and dividends, and whose share price has a high probability of rising over the long term. That’s why the only gold I own is my wedding ring.

I have slightly more than US$100,000 in a U.S. dollar savings account with one of the big Canadian banks. Am I protected by deposit insurance?

Yes – to an extent.

In April, 2020, Canada Deposit Insurance Corp. expanded its coverage to include foreign currency deposits held at eligible Canadian financial institutions. However, deposits are covered only up to a maximum of $100,000 in Canadian currency.

Converted to Canadian dollars, your US$100,000 deposit is worth about $125,000, which puts you over the insured limit. What’s more, for the purposes of determining your CDIC coverage, your U.S. dollar savings are lumped together with other non-registered deposits at the same financial institution, including Canadian dollar chequing accounts, savings accounts and guaranteed investment certificates.

So, for example, if you also have a Canadian dollar chequing account with $50,000 and a GIC with $10,000 at the same bank, your combined non-registered deposits would total about $185,000 ($125,000 plus $50,000 plus $10,000). That means about $85,000 of your cash would not be insured in the unlikely event of a bank failure.

Fortunately, it’s relatively easy to get around these limits. You could, for example, open an account at a different financial institution and move sufficient funds so that you are below the $100,000 insured limit per account type at each institution.

Another option would be to move some of your savings to a different account type at the same financial institution. Joint accounts, tax-free savings accounts, registered retirement savings plans and registered retirement income funds, for example, are all considered separate categories for the purposes of deposit insurance, each subject to its own $100,000 limit.

Depositors will soon get even more coverage from CDIC. Beginning April 30, registered education savings plans and registered disability savings plans will also qualify for separate coverage of up to $100,000 for eligible deposits. It’s important to remember that deposit insurance covers only chequing and savings deposits, term deposits and foreign currency deposits. It does not cover mutual funds, exchange-traded funds, stocks, bonds or cryptocurrencies.

E-mail your questions to jheinzl@globeandmail.com. I’m not able to respond personally to e-mails but I choose certain questions to answer in my column.

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