Gold News

Gold, Money and the Joys of Reinvested Income

A look at different ways to play the gold market...

SINCE 1971, I've been convinced that the global financial and monetary system could not do without gold in its monetary system, writes Julian Phillips of

Since 1971 the world has felt it could and has sidelined gold. The forty year experiment has succeeded because the tree trunk of the system has been the only currency with which to buy oil. All nations need oil, so had to bite that particular bullet. 

When we saw the selling of gold kept at a definitive level (after canvassing the gold market to make sure the gold market could absorb these tonnages, without hurting the Gold Price) it became clear that gold remained as an important reserve asset and recognized as such by the world's leading and largest central banks. We believed that gold would commence its return to the monetary system almost osmotically from then on. We believe that this process will continue over the years until it is an integral, functioning monetary asset, but at considerably higher prices. 

As we have often stated in our newsletters, gold is both cash and an asset internationally. So long as humanity doesn't trust each other, gold will be the only trustworthy money over time. But gold does not yield an income many will say. We don't decry the principle, which is why we should always consider the corporate version of gold, gold shares. So as to emphasize the value of income from investments, let's look at the value of income next. 

Oh, the joys of reinvested income. By this we mean profit, as well as dividends or interest. Income of any kind increases the amount of total returns and provides additional capital for investment. Like compound interest rates, the growth of that income has a faster impact on capital than many ever thought. No doubt you've played the game of deciding whether to allow a blacksmith charge $10 for each nail in the four horseshoes (each shoe needing eight nails) or paying 10 cents for the first nail and doubling the price thereafter? Amazing conclusion, isn't it? Likewise, never underestimate comparing a good dividend stream plus a slower capital growth in an investment.

Interest rates are at historic lows right now so not too much can be gained in the developed world just from deposits. However, fixed interest securities are a different matter, provided interest rates are falling not rising. Likewise in equity markets, when interest rates were at low levels, equity indices were at their peaks. This is not the case today as uncertainty and investment risks are heightened, leaving markets at relatively low levels while interest rates are on the floor. 

The future is one in which interest rates will continue at these lows, because if they rise now, they'll have a devastating effect on equity and fixed interest bond and bill markets as prices drop to compensate for rising interest rates.

Companies currently paying good dividends will see excellent capital growth compared to those companies not paying dividends!

This is going to be a growing trend. We first forecast this over a year ago and received many raised eyebrows, but in the last year dividends are being paid more and more and the companies that do so are seeing improved prices on their shares in the market relative to their peers. We now look at the importance of dividends in the future as this trend continues.

Measure potential dividend flow levels in the light of 'risk free' investments such as Treasuries. If you can get 3.7% on Treasuries then in around three years, you would hope that the total dividend you receive on your shares then will equal the interest paid annually and keep on rising relative to the price you originally paid for your shares thereafter. This dividend growth will warrant the added risks you are accepting on precious mining shares as opposed to the 'risk free' Treasuries you compare them to. In the best of markets, the rising price of the precious metal will provide the company with the added income needed to achieve that. 

But we mentioned at the outset that we need to buy shares that pay for their keep in the bad times too. How does one achieve that? Such shares are shares for 'all seasons'. If you can get rising prices together with inherent growth you will get a double whammy. When we look at a share we need to see the capacity for dividends to grow, prompting the share price to rise as well. What do we look for to make this happen?

If the gold share provides a rising dividend flow it will justify your investment in bear markets and pay for itself. 

In a bull market you will see capital appreciation of an extraordinary nature. In good and bad times such an investment will take care of your wealth.

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JULIAN PHILLIPS – one half of the highly respected team at – began his career in the financial markets back in 1970, when he left the British Army after serving as an Officer in the Light Infantry in Malaya, Mauritius, and Belfast.

First he worked in Timber Management and then joined the London Stock Exchange, qualifying as a member and specializing from the beginning in currencies, gold and the "Dollar Premium". On moving to South Africa, Julian was appointed a macro-economist for the Electricity Supply Commission – guiding currency decisions on the multi-billion foreign Loan Portfolio – before joining Chase Manhattan and the UK Merchant Bank, Hill Samuel, in Johannesburg.

There he specialized in gold, before moving to Capetown, where he established the Fund Management department of the Board of Executors. Julian returned to the "Gold World" over two years ago, contributing his exceptional experience and insights to Global Watch: The Gold Forecaster.

Legal Notice/Disclaimer: This document is not and should not be construed as an offer to sell or the solicitation of an offer to purchase or subscribe for any investment. Gold Forecaster/Julian D.W. Phillips have based this document on information obtained from sources they believe to be reliable but which it has not independently verified; they make no guarantee, representation or warranty and accepts no responsibility or liability as to its accuracy or completeness. Expressions of opinion are those of Gold Forecaster/Julian D.W. Phillips only and are subject to change without notice. They assume no warranty, liability or guarantee for the current relevance, correctness or completeness of any information provided within this report and will not be held liable for the consequence of reliance upon any opinion or statement contained herein or any omission. Furthermore, they assume no liability for any direct or indirect loss or damage or, in particular, for lost profit, which you may incur as a result of the use and existence of the information, provided within this report.

See full archive of Julian Phillips.

Please Note: All articles published here are to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it. Please review our Terms & Conditions for accessing Gold News.

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