So far in this series we’ve understood ourselves as investors, understood the investment climate in which we live, and what we expect in the future. We’ve also been made aware of the unseen dangers lying ahead for investors and realized that the days we live in push us to design out portfolio to withstand the dangers of bad times. One of the hardest tests for an investor is to be able to overcome emotions and loyalties to an investment whose fortunes may have changed. We have to be ruthless with our own portfolios changing or selling outright those shares whose future performance doesn’t look good and switching into one with good growth or out of the market altogether. Don’t get me wrong, there are many shares or other investments which are great for a generation or more. Having seen the ‘big’ picture and where it’s going we move to the next decision, which sector should we invest in?

Sector Choice

Since 1971, I’ve been convinced that the global financial and monetary system could not do without gold in its monetary system. 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 osmoticaly 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. So far we have been correct and subscribers have shared in our insights and success.

Joining gold as the preferred generation long-preferred investment comes the other precious metal with an underlying monetary history, silver.

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.

Income on Income

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.

Dividend Flows

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.