So the Federal Reserve, as expected, fired the starting gun last night by cutting the benchmark rate by 0.25%. This was the first such reduction since the depths of the financial crisis a decade ago, and is expected to prompt a wave of monetary easing from other central banks in the weeks and months ahead, including the Bank of England.
And this provides some fresh food for thought on how individuals should play this low-rate environment to get richer.
1. Avoid cash accounts
My first piece of advice is a warning of what NOT to do in the current climate, and that’s to lock your money up in a cash product. But it’s a critical piece of advice we should all follow to protect our wealth.
We’ve dedicated plenty of column inches to discussing the pathetic interest rates on offer from cash products. There’s not a single cash-based ISA, for example, which offers a rate above 1.5%. It’s likely that rates will be pulled back by savings product providers should the Bank of England indeed slash the benchmark rate.
An environment of low interest rates leads to a backdrop of higher inflation too, which in the UK has been at 2% in recent months. In real terms, it’s probable that the value of your money locked up in one of those cash accounts will continue to slide.
2. Get into gold
In times of rising inflation like these, demand for gold really comes into its own. This is why the yellow metal’s perked up again in recent days, hitting the $1,430 per ounce marker again and sitting within a whisker of July’s six-year highs.
Gold has been considered the ultimate store-of-value metal for much of human history, and especially so in times like these when the value of fiat money is eroded through dovish monetary policy.
It’s worth remembering, though, that central bank action is not the only driver of inflationary fears right now. The increasing political tension between Iran and the West is exacerbating such concerns by causing oil values to rise as well (WTI crude is spiking back towards $60 per barrel as I type).
3. Buy stocks
The best way to capitalise on a soaring gold price, at least in my opinion, is to buy companies dedicated to the excavation of the precious commodity.
The problem with this strategy is the heightened uncertainty that comes with mining shares, where production problems and disappointing reserve and resource estimates can take a hammer to earnings estimates.
On the plus side, investors can get access to some really juicy dividend yields. And this really sets such stock investment apart from buying bars or coins, or from buying into physical gold-backed exchange-traded funds (ETFs), products which don’t pay dividends.
Right now share pickers can grab a chubby 4.6% forward dividend yield with Caledonian Mining Corporation, a 4.7% one with Polymetal International and 3.9% with Highland Gold Mining Company.
It’s possible to grab dividends through the several ETFs that comprise a stable of precious metals producers (such as the Sprott Gold Miners ETF), a tactic which also spreads the risk associated with investment in the mining sector.