Buy gold while you still can

The outcome of the U.S. election is making investors skittish. However, notes market observer Edward Gardiner, a Trump victory will precipitate a stock market disaster—but the price of gold will go through the roof.

Now that the North American stock markets have recovered from the Brexit panic, what’s likely to be in store for the near future?

The next obvious threat is the U.S. presidential election. If Donald Trump wins, the impact on the financial markets will be deeper and longer-lasting than what we saw with Brexit.

Quite simply, the man is a potential disaster. He is just too volatile to be trusted with that much power. Even if he turns out to be more stable than he appears to be at the moment, he’s too much of a loose cannon for the markets to tolerate.

I am reluctant to make a hard forecast, but in this case I will go out on a limb and say that if he wins, my stock market outlook is for at least a 20 per cent drop in prices; and it won’t be a temporary drop. On the other hand, my bullion market outlook is that the price of gold will go through the roof as investors look for security.

Between now and the election, markets will be unstable and highly volatile, responding to every little change in the opinion polls. Added to the mix are the wars in the Middle East, terrorism in Europe, what appears to be increasing racial violence in the U.S. and a general economic malaise throughout the world.

If Hillary Clinton wins, things won’t be as bad, but the markets will remain skittish for the next few years. After all, she represents the current power structure, which nobody trusts anymore. The slightest mistake or error in judgment on her part will cause blips in the markets – volatility writ large.

In these circumstances, the ordinary investor should be concerned with safety. By all means buy some gold, even if it’s just the “paper” kind (i.e. that offered by Central Fund of Canada Ltd. (TSX—CEF.A) or the Royal Canadian Mint (TSX—MNT)).

Of course, if Trump wins, you may want to buy gold bullion. And I’m not sure I would rule out a ‘survivalist’ approach: guns, ammunition and food. OK, that’s a bit extreme, but I’m trying to show how scary a Trump win would be for the financial markets.

Utilities and infrastructure stocks, especially those with operations in more than one country, offer some protection through diversification, and most offer good dividend yields as well. The big pipelines TransCanada Corp. (TSX—TRP) and Enbridge Inc. (TSX—ENB) and power companies like Canadian Utilities Ltd. (TSX—CU) and Fortis Inc. (TSX—FTS) are good examples here.

Aging infrastructure

On another front, most western economies are faced with aging infrastructures and their governments are hoping to revitalize their economies by engaging in renewal projects.

Of course, they don’t have any money to do it with, but being governments, they will simply print some. Normally I would frown on such tactics, but in this case it might just be a good idea.

It will cause significant inflation a few years down the road but that’s probably ‘less bad’ than a massive recession in the near future. And if you hold shares in the companies that are involved in the projects, it should be profitable in both the near-term and the long-term. A couple of examples are Brookfield Asset Management Inc. (TSX—BAM.A) and WSP Global Inc. (TSX—WSP).

Brookfield, which I have written about in the past, is like a mini-mutual fund, with operations in real estate, renewable energy, and infrastructure. It has an excellent management team and a highly successful track record. Its share price continues to rise and it regularly raises dividends and often splits its shares providing further benefits to shareholders.

It has also ‘spun out’ several operations: Brookfield Property Partners LP (TSX—BPY.UN), Brookfield Infrastructure Partners LP (TSX—BIP.UN) and Brookfield Business Partners LP (TSX—BBU.UN), which have been profitable to shareholders as well. I’m not a big fan of spinoffs, but I can’t argue with success.

WSP Global is a consulting firm that manages projects in real estate, transportation, infrastructure, industry and resources, for both government and the private sector. It has an excellent track record over the last few years and seems well-positioned to participate in a number of projects around the world.

Avoid bank stocks; take profits

Another sector that continues to do well despite my fears is the banks. I admit they are taking steps to try and control their mortgage portfolios, typically by requiring larger down payments (although they aren’t really anxious to let the public know it) but I believe they still have way too much invested in this product area. And I repeat what I have been saying for what seems like a long time—interest rates are too low.

Sooner or later, investors are gong to stop accepting these ridiculous rates and the banks (and their friends in government) will have to back down and raise the rates that they pay depositors. If the banks have too much money invested in low-yielding mortgages, they will find that the spread between what they pay and what they get is growing and eating into profits.

I don’t know when that’s going to happen, but I’m convinced it will occur.

As far as the bank stocks go, I repeat what I have been saying for some time now. Don’t put any new money in the sector and consider taking some profits from anything you already own.

On balance, we seem to be living in the middle of a Chinese curse (interesting times).

The watchword for investors, at least for the next few months, should be safety. I’m not suggesting hiding your money under the mattress or burying it in the backyard, but I personally am not planning any new investments until after the U.S. election.

Ed Gardiner, a Bell Canada retiree, is a keen observer of the markets. He lives in Ottawa.

 

Investor’s Digest of Canada, MPL Communications Inc.
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