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The gold price has rallied 28 per cent in 2020 and this is understandable as an outgrowth of extremely low global interest rates, particularly U.S. inflation-adjusted bond yields. As an explanation, low yields work in practice but the theoretical underpinnings are more problematic.

The rise in the bullion price has been accompanied by a proportionate move lower in U.S. inflation-adjusted bond yields (I posted the chart on social media here). The degree of correlation in the relationship is extremely high.

There are two reasons for gold to move higher as real yields decline. Under normal conditions, lower yields attract fewer global income investors. This translates into a weaker U.S. dollar in currency markets because foreign investors aren’t exchanging as much of their currencies into greenbacks to buy Treasuries. Gold is priced in U.S. dollars, so any drop in the currency immediately pushes up the gold price.

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The other reason is opportunity cost. When bond yields are high, gold – which pays no income or dividends – is less attractive to own. When yields are very low, bullion investors are forfeiting less in annual income.

The gold price is also tracking the global value of negative yielding government bonds, which makes sense. As a store of value and spending power, negative yielding bonds are a dubious investment option. Gold, at least theoretically, retains the same spending power over the long term.

In the past, gold’s primary market function has been to protect investors from the effects of inflation. As the price of goods and services climb, the spending power of conventional currencies declines while gold retains the same value.

Deflation is a much bigger risk than inflation, at least for now, and this makes the investment purpose of precious metals a bit confusing. There are investors concerned that the unprecedented degree of central bank monetary stimulus since 2008 will result in financial catastrophe and currency collapses and gold certainly provides some insurance against that scenario.

In the short term, investors can expect precious metals prices to climb as long as inflation-adjusted yields fall, and leave the financial theory to academics. Credit Suisse’s global strategist Andrew Garthwaite believes that U.S. real yields will fall from the current -0.94 per cent to -2.0 per cent so the trend may have a long way to run.

-- Scott Barlow, Globe and Mail market strategist

This is the Globe Investor newsletter, published three times each week. If someone has forwarded this e-mail newsletter to you or you’re reading this on the web, you can sign up for the newsletter and others on our newsletter signup page.

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Stocks to ponder

Stella Jones Inc. (SJ-T), a Quebec company that produces pressure-treated wood products, will release its second-quarter financial results next week. The consensus sales and earnings estimates may prove to be too conservative given strong reported industry data. Jennifer Dowty has more on this stock (For Globe subs)

The Rundown

Banks top this list of 10 dividend stocks that could still be a bargain

Left behind by the market rally? The moment of maximum pain for stocks has long passed, but there are still some decent values to be had. Rob Carrick reports on a list of 10 TSX-listed stocks considered to be under or fairly valued. (For Globe subs)

One tool to help investors test the water

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Investors looking at the stock market are nervous about its waters, which have been less than inviting this year. But there are tools they can use to gauge whether the market is hot or not. In this story, Norman Rothery looks at how a simple moving-average strategy fared as a market timing method over the past few decades. (For Globe subs)

How the pandemic could cost you some of your CPP retirement benefits

If you’re not working, you and your employer aren’t making CPP contributions on your behalf. Those lost payments could result in a lower monthly CPP payment when you retire. Rob Carrick looks at some of the longer-term effects the pandemic is having on our finances. (For Globe subs)

Others (for subscribers)

Wednesday’s Insider Report: Senior VP lands a $2-million payday as this dividend stock soars to a record high

Tuesday’s Insider Report: CEO invests over $270,000 in this fallen dividend stock

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‘Pandemic Leaders’: Top global stock picks from Credit Suisse

Large-cap tech stocks ‘superior in every way’

Wednesday’s analyst upgrades and downgrades

Tuesday’s analyst upgrades and downgrades

Rare pause in tech appetite suggests some indigestion

Others (for everyone)

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Warren Buffett’s Berkshire Hathaway buys another $400-million of Bank of America stock

Canadian dollar firms as rising U.S. coronavirus cases weigh on greenback

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Ask Globe Investor

Question: I want to compare my portfolio’s performance to that of the S&P/TSX Composite Index. However, when I look up the S&P/TSX’s yearly returns, the numbers vary from one website to another. Is there a reliable source for the index’s returns?

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Answer: It’s possible that returns published by some websites measure only the change in the index, without dividends, while others measure the total return, which assumes all dividends were reinvested.

To do an apples-to-apples comparison with your portfolio, and to make sure you are getting a complete picture of the S&P/TSX’s performance, you should be looking at the index’s total return, with dividends. The method I’ll show takes a bit of work, but it can be customized for any time frame and will also allow you to convert the S&P/TSX’s total return for any period to an annualized number.

The good news is you don’t have to actually add up all the dividends paid by the stocks in the index to calculate its total return. Just go to and look up the S&P/TSX Composite Total Return Index (enter the symbol TRGSPTSE). This souped-up version of the S&P/TSX measures the index’s performance with all dividends reinvested. By clicking on “historical data” and adjusting the date range, you can look up values of the S&P/TSX Composite Total Return Index for any time period.

Let’s say you’re interested in how the S&P/TSX Composite Total Return Index performed for the 10 years ended June 30. According to, the index closed at 55,943.07 that day. Ten years earlier, on June 30, 2010, it closed at 30,229.89. To calculate the total return for that period, subtract the starting value from the ending value. Then divide the difference – 25,713.18 – by the starting value. The answer is about 0.85, or a total return of 85 per cent, including reinvested dividends.

Now, what does that total return of 85 per cent over the past 10 years work out to on a compound annual basis? You could use a spreadsheet or a scientific calculator to figure this out. Or, to make things easier, use a web-based annual rate of return calculator.

With a google search, I found a calculator at here. I chose a start date of June 30, 2010, and end date of June 30, 2020, then entered the respective total return index values in the “initial deposit” and “future value” boxes (the calculator is designed for dollar amounts, but index values work just as well). Then I clicked “calculate,” which revealed that the compound annual rate of return over the period was 6.35 per cent.

(Incidentally, the compound annual return for the plain-vanilla S&P/TSX Composite Index over the same period, excluding dividends, was about 3.2 per cent – or roughly half of the total return with dividends included. This shows how important dividends are to an investor’s returns.)

If the above sounds like too much work for you, there’s an easier way to find the S&P/TSX Composite Total Return Index’s annualized performance over various periods. However, it doesn’t give you as much flexibility to customize date ranges.

Go to the iShares Canada website and find the page for the iShares Core S&P/TSX Capped Composite Index ETF (XIC). Next, click on “performance.” The row labelled “Benchmark %” provides the annualized total return of the S&P/TSX Composite Index – with dividends reinvested – over one-, three-, five- and 10-year periods. You can specify a month-end date – such as June 30, 2020, or Dec. 31, 2019 – or look up the index’s total return for calendar years going back to 2015.

--John Heinzl

What’s up in the days ahead

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

More Globe Investor coverage

For more Globe Investor stories, follow us on Twitter @globeinvestor

You may also be interested in our Market Update or Carrick on Money newsletters. Explore them on our newsletter signup page.

Compiled by Globe Investor Staff

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