The Tax-Free Savings Account (TFSA) has become more widespread and commonplace than the Registered Retirement Savings Plan (RRSP), and it is no wonder why. Relatively few people, by the percentage of our Canadian population, have the forethought to start investing for their retirement in their early years, and even fewer have the patience to invest in something in their RRSP and then forget about it. But everyone understands the TFSA, and after all, it is “Tax-Free”.
It is ideal for a number of investment goals (from short-term to long-term), and people who only have a limited amount to invest typically prefer the TFSA over the RRSP. Its tax-free nature and lack of restrictions on withdrawals make it a perfect place to grow your emergency funds.
And TFSAs just got better. The 2021 contribution limit has been announced ($6,000), and if someone has not yet contributed a single dollar to their TFSA, and they turned 18 on or before 2009 (when it started), they can contribute up to $75,500 to the account. It is a considerable sum, and if invested well it can grow significantly. So, let’s talk about adding gold and silver to your TFSA. Let me start with just a fact.
Once considered an insane argument (Gold and or silver in your TFSA), it is now becoming saner by the moment. If you are reading, then how about this “Fun Fact”: Contrarian investors in gold (about a measly little 1% of the investing public to date) have been enjoying an enviable run of price appreciation since 2000. Gold has dramatically outperformed stocks this century, gaining about 555% vs. 146% gains for the S&P or 90% for you TSXers. Balance is the key.
Do not run out and grab all your hard-earned invested dollars and throw them into gold or silver unless you are a substantially well-positioned expert who understands risk. But then again do not go out and do what everyone else does and think that cash, bonds, and stocks are a well-diversified portfolio. Those days are gone. Over. Done with.
This past Friday StatsCan had some disturbing things to say: Canadian household net worth since the virus hit, has increased a cumulative $600 billion. As mentioned several times in my blogs and articles before, the average savings rate exploded higher with the pandemic. CIBC says $170 billion in cash now sits in bank accounts, both private and corporate. Real estate sales and prices have cruised higher. In the GTA the average property was worth just north of $910K in February when life was normal. In November, after nine months of unemployment, lockdown, death, and quarantine, that property was worth approximately a little more than $955K. (No there is nothing wrong with that…. Lol)
Per capita, household net worth is a little north of $320K, much of it in real estate, which is approximately $12K more than a year earlier. Across Canada, housing soared in value by $440 billion in a single year, and most of that was represented by new mortgage debt. Mortgage rates tumbled by about half, down to the 1.5% range. That meant even more debt was carried with lower costs, so the rate of debt to assets fell to a 15-year low.
Cheap rates and $250 billion in direct payments to individuals, plus $180 billion in mortgage and credit card payment deferrals, along with sharply reduced family costs, (as work from home wiped away commuting and childcare charges) have been profound. The wealth gap has broadened yet again. Houses have become precipitously less affordable. Low-wage people have seen their employment wiped away. Small businesses have been annihilated. Families with assets, like real estate holdings or portfolios of financial assets, have benefited excessively. Stock markets are finishing the worst year in a century for global recession and a public health crisis at record levels. So, what might you ask is 2020 laying the foundation for?
First, more gains. Optimism is a wicked double-edged sword. It will continue to invite irrational behaviour and along with these cheap mortgage rates will probably deliver a record real estate run come spring. Many buyers will swallow enormous mortgages at rates that can only increase in the future. Condo deals will fade as it becomes clear business owners want their people back at their desks.
Stock markets, gold and silver prices, many other commodities, and correlated financial assets will feed off the economic growth that the vaccine brings because certainty in the long-term direction will not be there. Global GDP will increase, central banks will continue their stimulus programs and corporate profits will seemingly head towards restoration. Some analysts are even openly talking about comparisons to the roaring 1920’s. But there will be a divide. Trouble does lie ahead.
Low mortgage rates cannot last forever. When growth brings the spectre of inflation bond investors will want a premium, and yields increase. Higher rates will be a shock when mortgages are renewed, while Ottawa services over $1 trillion in accumulated debt. Decisions taken amid a crisis in 2020 may look sketchy in 2025. Regardless of the actions taken by central banks, the price of money will rise. And so will the cost of living. A lot. Just contemplate what the carbon tax will bring alone.
Tax levels are going to rise and will most likely turn a good chunk of folks into fetal position in their attempts to restore faith in a system that supported them during a crisis but went after every dollar it lent to them right after. No country the size of Canada can increase public spending, and debt ($380 Billion and rising this year alone) free of consequences. The future will undoubtedly bring higher corporate taxes, an increase in the capital gains rate, empty-house taxes, higher property tax, an additional tax bracket, more user fees, decreased local services, and an extra cost for every online purchase you make or streaming movie you watch.
Chances are 2021 will bring a federal election in Canada and God-knows-what in the USA. Who knows if Canadians will re-elect the Liberals, who now lay claim to the worst fiscal record in history, just because they dole out more money? Will the seventy million Americans who Donald Trump tricked into thinking the Biden presidency is illegitimate create discord, gridlock or worse? In a world of increasing isolationism, how do we deal with common challenges like global debt, wealth inequality, climate change and a disgusting little pathogen named COVID-19? We barely survived 2020, after all.
Well, stay the course. But be balanced and diversified in better ways. Fill your tax shelter vehicles by using up untapped space, starting with your TFSA, and think in a broader way about assets like physical bars of gold and silver that are no longer cumbersome to own or hard to buy and sell. They represent a two-fold benefit as hard assets that can be used if the proverbial “you-know-what” hits the fan. Do not be seduced into new buckets of debt. Think about kissing up to our employer. Shun GICs. And of course, get vaccinated.
The future cannot come soon enough.
Yours to the penny,
Darren V. Long
Delta Harbour Assets