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What is Working with Lower Rates for More Income & Gains

August 01, 2019

The Federal Reserve and its Federal Open Market Committee (FOMC) are adapting to lower inflation with lower interest rates. I recommend buying gold right now as one of the prime ways to cash in on lower rates.

On its own, gold offers no yield. Worse, it costs money to hold it. Generally, investors who buy gold bake in a loss if the price of the metal goes nowhere. So, I’m not making this recommendation lightly.

Gold must be stored somewhere and storage costs money. On top of that, there’s the opportunity cost of what you could be earning in a money market or from Treasury Bills. For me to justify buying and owning a gold security, there have to be good reasons for prices to rise above storage and opportunity costs. And I think there are good reasons for that to be the case right now.

Mining Gold Prices

One of the major drivers of gold prices are interest rates. And as interest rates provide the opportunity cost to hold it—falling rates means gold is cheaper to own.

Furthermore, if you look at short-term US dollar interest rates, as measured by the three-month London Interbank Offered Rate (LIBOR), you can see that gold muddled along for much of 2018 as LIBOR rose. But in 2019, LIBOR has been slipping and sliding while gold has been on the rise.

Spot Gold (Yellow) US Dollar 3 Month Libor Rates (White)—Source: Bloomberg Finance, L.P.

Global Uncertainty Bolsters Gold

US interest rates and the dollar are just two of the major factors in pricing gold. In addition, gold is getting buying attention as the rest of the globe remains in less desirable economic conditions.

Europe and parts of Asia are in economic trouble and show little progress in their core economies. They’re also facing many political headwinds. Specifically, in key European and Japanese markets, interest rates are actually negative, with depositors paying rather than receiving interest.

That has extended further into the bond markets, with government and an increasing number of corporate bonds having negative yields. That means bonds cost money to hold, and that is helping gold demand outside of the US.

Back in the US, politics and the 2020 elections are fully engaged and are presenting their own challenges, while investors and strategists are plotting alternatives as we get closer and closer to November of next year. Gold tends to perform well during periods of uncertainty.

Better Way to Own Gold

As I noted above, holding gold comes with costs. Along with storage costs, it costs commissions to buy and sell gold and bid/offer spreads. Even the leading gold ETF, the SPDR Gold Shares (GLD), has its underlying charges adding up to a 40 basis points (0.40%) per year, and it doesn’t pay a penny in dividends.

So, I found a better way to get exposure to gold, and that is to own Franco-Nevada Corporation (FNV).

FNV isn’t a mining company. It long ago figured out that mining wasn’t the most profitable and predictable way to cash in on gold. Instead, the company acquires and holds royalty interests from gold producers and also owns proceeds from gold mining companies. This means that it doesn’t have to buy and run mines, so it avoids all of the costs of capital equipment and associated uncertainties to the business.

It just collects cash from gold production by its tenants. When gold prices rise, the company makes more revenue. When gold prices fall, the company makes less, but it still makes money.

And it pays its shareholders their cut of the profits from gold revenues flowing across its books. That equates to a dividend yield of 1.12%, which has been on the rise in actual distributions over the past five years alone on average by 3.93% per year. That’s not a big yield,  but it is way better than GLD, which will cost you 40 basis points.

Franco-Nevada stock is proving out to be a great way to own gold. Since September 11 of last year to date, FNV has generated a total return of 53.42% against GLD’s return of 18.26%. That’s a 192.55% better return.

Franco-Nevada (FNV in White) and SPDR Gold Shares (GLD in Orange) Total Return—Source: Bloomberg Finance, L.P.

And over the past five years, FNV has outperformed GLD by a total return margin of 800.92%.

I am recommending FNV as the better way to own gold ideally in a taxable account.

Current Canadian and US tax treaties have Canada pledging not to withhold income taxes on US individual investors holding Canadian stocks in retirement accounts, which makes FNV eligible for tax-free accounts. However, there is no guarantee that this tax policy won’t change.

Buy Franco-Nevada (FNV). It’s my favorite way to own gold for growth and dividend income.

All My Best,

Neil George

Editor, Dividend Digest & Profitable Investing

PS—Now that I’ve presented one of my favorite ways to continue to cash in on lower interest rates for more income and gains, perhaps you might like to see more of  my market research and recommendations for further safer growth and bigger reliable income.

And if you’d like to talk in person, I’ll be in San Francisco on August 15-17 at the MoneyShow investment conference where I’ll be presenting my economic and market analysis and my latest investment themes and recommendations. Click here for more information.