Newsletter April 24, 2021

Recent Stock Market Performance

Stock markets have surged higher since the start of this year.  As of April 24, the U.S. market (the S&P 500 index) is up 11% and that’s on top of a huge surge of 16% in 2020 (despite the pandemic). In Toronto the stock market is up 9.5% this year to date but it was up only 2.2% in 2020.

In 2021, the stocks that InvestorsFriend rated in the Buy or strong Buy range are up an average of 21% and only two of the 21 are down in price. I would hasten to add that this is well beyond what we expected. It’s definitely not typical.

Where to Invest?

If you are new to investing, take a look at our article that shows how Canadians can instantly set up a diversified portfolio.

Try our stock picks.

For those interested, we have a paid service that provides our individual stock picks and analysis. In addition to the stock picks, I provide a short daily comment on the market five days a week. We don’t make any guarantees on performance but we do guarantee to be honest and transparent and to show you the detailed logic behind every stock pick.

Buying Physical Gold including Gold Coins

I happened to notice recently that the choices TD Bank has under “Investment Products” are: GICs, Mutual funds, and Precious Metals.

I was surprised to see precious metals (gold and silver) listed alongside such unsophisticated products as GICs and mutual funds. It strikes me as a bit dangerous.

Upon investigation I see that under gold, TD is selling gold coins and gold wafers/bars.

Most of the coins are one ounce although some are as small as 1/10th ounce. Prices for 1 ounce coins range from Canadian $2402 to as high as $2566. This is noticeably higher than the Canadian dollar value of one ounce of gold which is $2232 at the time of writing. Investors buying gold coins need to be aware that they are paying  a premium over and above the value of the actual gold.

Prices for 1 ounce gold bars ranged from $2358 to $2403 which is 6% to 8% above the quoted spot value of gold per ounce.

I would consider these coins and small gold bars to be collectibles as opposed to financial investments.

Checking online I see that Canadagold has 10 retail locations across Canada and it appears that their prices are lower. For example, 7% lower for a Maple Leaf gold coin.

I would not recommend gold coins or bars as an investment due to the risk of loss or theft and due to the fact that the cost is higher than the gold content and there would be a fairly large buy/sell spread. And it appears that a retail gold store will have better prices than TD.

For the serious physical gold bug TD offers a 1 kilogram gold bar currently quoted at $74,100. At 32.15 troy ounces per kilogram, that’s about 3% higher than the spot gold value.

My conclusion is that what TD offers is more for collectibles and might be bought as a gift. For actual gold investments, I would go with an exchange Traded fund that holds physical gold.  Examples are CGL on the Toronto stock exchange which is an iShares gold trust hedged to Canadian dollars. Or MNT on Toronto which is offered by the Royal Canadian Mint and is not hedged to the Canadian dollar.

Buying Life Insurance?

In 20 years online, I have never gotten involved in promoting any product or service. I am often asked to promote various financial products such as foreign exchange trading sites. But I never do it.

However, I recently came across a new company that is selling life insurance online and it seemed like an intriguing idea. After investigation and after speaking at some length to the leaders of this company I am satisfied that it is a good outfit and that it could save most people money on a life insurance purchase. Although it is an online service, they have licensed agents that will help you select the right product for your needs. Be very sure to take your time to get the right product if you are buying life insurance.

Here’s how they describe what they offer: Dundas Life makes life insurance easier, more accessible, and personalized. Compare rates and get coverage from Canada’s top providers. You can be insured for up to $1,000,000+ in coverage. Get started today in 5 minutes or less.

You can check out what they offer at this link. Note: They are currently licensed to sell to customers only in Ontario, B.C. and Alberta.

Money and Banking

The nature of money and how it is created in the economy is not easy to understand.

Part of the reason that money at the national level is hard to understand is that the total quantity of money at the national level works very differently than how it works in our own individual bank accounts.

Money that is spent, still exists 

When individuals or businesses spend money it of course disappears from their bank accounts. Our money is a wasting asset in that sense. When it is spent it is “gone”.  We can say that our money went “into” a bicycle  or we put it “into” the stock market. We need to replenish our money as we spend it or we will run out of money.

But think about money at the level of the whole country. Money that is “spent” ends up in someone else’s pocket, cash register or bank account. Spending money does not deplete the total amount of money in circulation. We hear talk of investors as a group putting more money “into” the stock market. But in reality, one investor buying stocks from another simply transfers money from the buyers account to the sellers account. At the level of a country, money is a transfer mechanism.

If an individual or business could “print” legitimate money they would become vastly wealthy. But it’s pretty clear that a country cannot become wealthier by simply printing money. A certain amount of money needs to be created in a country and there may be times where government money printing is beneficial. But ultimately unlimited money printing cannot possibly be the “road to riches” at the national level.

At the individual level, money is wealth. At the national level money is not really wealth. The real wealth of a nation and it citizens is things like the physical houses and factories and buildings of all types and roads and (importantly) knowledge and also computer systems and communications systems.

Money creation

Strangely but truly money is created in most or perhaps all cases by borrowing. Borrowing by governments, individuals and corporations literally creates money. Paradoxically, paying back loans decreases the total amount of money in circulation and borrowing increases the total money supply.

There is nothing evil or nefarious about this. It’s just the way it works. Claims that this is evil stem from the persistent but incorrect image of money as consisting of a limited number of paper bills printed by government. Or from the even more archaic notion that money should consist of a limited number of gold and silver coins.

Excess savings? People and businesses sitting on excess cash?

Currently the financial press has many stories about consumers and businesses “sitting on” excess cash and savings. Canadians are said have some $90 billion of “excess” savings. And business are said to be “sitting on” $120 billion of excess cash.

The hope and assumption is that post-COVID this excess money will be “spent” and/or “invested” which will boost the economy. I don’t disagree with that but I take some issue with how things have worked and will work.

First, given that money is created when governments (and anyone else) borrow, and given the massive government borrowing of late and also significant corporate borrowing, that created money had to show up as someone’s cash.

There seems to be an assumption that if consumers had spent all of their government assistance money and if businesses had invested or spent all their assistance money then we would not have this “excess” cash. But for the country, money spent by one individual or business simply ends up in the account of another individual or business. The money was created by the “excess” borrowing and so it seems wrong to call it excess cash or excess savings. The only way for this money to be reduced or disappear is for it to be used to repay loans. But on average, the people and businesses with the excess debt are not the ones with the excess cash and so loans are not being paid down to any great extent.

We always seem to have this erroneous picture of cash as paper money. Corporations do not have $120 billion of excess cash in the office safe. That  money is in their bank accounts. And on a bank balance sheet it is funding loans. And no matter where it is ultimately spent it is going to end up simply being transferred to another bank account – unless it is used to repay a loan.

Pundits say they want cash to move out of banks and “into” the economy. In reality the best that can happen is that it will move “through” the economy from one bank account to another. To grow the economy, money needs to move at an accelerated pace.

Central Bank Digital Currency?

I read where central banks might issue a digital currency to compete with Bitcoin. This confuses me because in fact our money is already almost entirely digital. We keep having this picture in our heads of money as being bits of paper. It’s mostly not. I guess the digital currency that the central banks have in mind would include anonymity like paper cash. That’s already easily done with reloadable pre-paid credit and debt cards. We just need banks to issue more of those. These could be loaded with small amounts and there would be no record of where it was spent – like paper cash.

Bank reserve ratios and capital ratios

The following will be better understood if you understand how banks work and can picture what the balance sheet of a savings and loan bank looks like. We have a short article that shows it.

Banks, by nature and by regulation, are subject to two main balance sheet constraints. The two are vastly different. They actually sit on opposite sides of the balance sheet and yet are often confused with one another.

First, a bank must for both practical and regulatory reasons keep a certain amount of cash on hand to allow for withdrawals. Cash must be kept at a certain minimum percentage of its total assets. This is called the cash reserve ratio.

In practice, the amount and percentage of cash that a bank needs to keep on hand has gone down dramatically for several reasons.

Historically, especially in the U.S., banks were small and had very few branches and sometimes served only one City. Historically, also, there were no debit cards and no credit cards. There were cheques, but but most people took their wages out largely in paper cash for spending purposes.  A small bank like that had to keep substantial cash on hand for unexpected withdrawals. And any rumor that the bank was financially shaky would cause a huge exodus of cash. There was no deposit insurance in the early days. So, early banks needed to keep a large percentage of their assets in cash.

As banks got larger they also developed procedures to almost instantly borrow cash from one another. Larger, more solid banks and deposit insurance meant that there would almost never be any fearful “run on the bank”.  (But it can still happen, in Canada Home Capital suffered a massive run on the bank in the spring of 2017. Its high interest savings deposits “fled” due to news and fears that it was facing mortgage fraud problems. It was rescued by Warren Buffett).

The situation in Canada today is that most of the banks are huge. They can instantly borrow cash from other banks when needed. In extreme cases they can borrow from the Bank of Canada. Deposit insurance and the stability of Canada’s banks makes a “run” on the larger banks extremely unlikely. And, with paper cash cash largely going out of style, cash is rarely taken out of banks in paper form. Rather, it is simply transferred to another bank, where the first bank can borrow it back if needed. Due to all of these factors, Canada’s large banks today can and do operate with very low levels of “cash”.  That includes not just paper cash, but also their cash deposits at other banks and at the central bank. They simply have very little cash of their own. Ironically, almost all cash or money consists of bank deposits and yet banks have extremely little cash. Did I mention that money and banking is not easy to understand?

In Canada there is no regulated minimum cash reserve that banks must keep on hand. They keep just a small amount that they need in their operations and they are safe in the knowledge that they can instantly borrow any needed cash.

The second balance sheet constraint on banks is on the other side of the balance sheet. Their owner’s equity has to be kept at certain minimum levels compared to their assets. Banks are highly leveraged by nature. Their assets (mostly loans) can be as much as 30 times larger than their owner’s equity in some cases. The more leveraged they are, the higher return on owner’s equity they can make. But leverage is also dangerous in the case of loan losses. Regulators require minimum equity (or capital) ratios in order to insure banks remain solvent. Apparently, without regulations, some banks would basically leverage themselves to extreme and risky levels.


Money and banking are complex to understand. But perhaps all that most people really need to know is that it is better to have more money and more wealth. They need to know that money is usually hard to come by and easily disbursed and they should act accordingly. For example, by investing their money for growth. It is far more useful to understand how to get more money in your own bank account than to understand how money is created in the economy.


InvestorsFriend Inc.

April 24, 2021

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