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Get Paid to Own Gold

April 16, 2020

With stock and bond market turmoil, gold continues to grab the attention of traders and investors, even though it didn’t initially provide much of a haven.

Stocks in the US sold off quite hard from March 4-23, resulting in a 28.4% loss in the S&P 500.

Gold prices came down just like most other assets, as everyone went to cash to shore up portfolios or to meet margin calls from stock losses.

The spot price for gold dropped from its $1,680 high on March 9 to around $1,470 on March 19.

S&P 500 Index (White) & Spot Gold Price (Gold)—Source: Bloomberg Finance, L.P.

But from March 19 to date, gold has rallied back. The spot price is now sitting at $1,720. That’s a 17% rally in less than a month. And unlike stocks, gold prices are very positive year to date.

Gold is gaining from some major fundamental conditions, most of all from the plunge in US short-term interest rates.

The Federal Reserve dropped its Fed Funds target rate to zero. And there has been very heavy buying of nearly everything—Treasury bills, notes and bonds, corporate bonds, corporate loans, municipal bonds as well as bond ETFs and beyond.

Yields have plunged, with 3-month rates down this year from over 1.57% to a current 0.13%, with yields actually dipping into negative rates.

This make gold all the cheaper to own and more desirable as a parking place versus cash.

US Treasury 3 Month Yield—Source: Bloomberg Finance, L.P.

With some dust settled in the stock market for leveraged trades and bonds getting a major boost from the Fed, gold is seeing less liquidation for cash needs.

The US dollar wasn’t helping gold when it was soaring as investors dumped stocks in March. Everyone around the globe needed cash and that cash needed to be in US dollars.

Bloomberg US Dollar Index—Source: Bloomberg Finance, L.P.

But since the Fed has been stepping in with trillions of dollars in bond buying and financial transactions aiding liquidity, the US dollar has settled down and eased back, now helping the price of gold in US dollar terms.

Gold may well continue to rise from its recent pullback, again aided by super-low interest rates and the shutdown of the US economy.

But as we get through the virus crisis, stock buying will eventually get underway, and this will pull capital away from gold into stocks.

And with bond segments at bargain levels relative to US Treasuries, I’m watching for continued bond buying, which will also pull capital from gold investments.

But for now, gold should be a part of your portfolio. And it remains inside the model portfolios of my Profitable Investing advisory.

My recommended way to own gold is in a gold investment that pays a dividend. Gold in and of itself pays nothing.

And in addition, it costs money to store gold, even for gold ETFs like the SPDR Gold Shares ETF (GLD) that charges 0.40% annually to service its synthetic gold holdings.

Franco-Nevada Corporation (FNV), on the other hand, is a company that doesn’t mine gold, nor does it own and store it.

Instead, it has acquired and continues to acquire interests in gold and other precious resource production. So, as gold is brought to the market, it gets its cut from the sales.

And it does this week after week, month after month, year in and year out.

It cuts its shareholders into its revenues with dividend checks. The checks are running at 25 cents per share and should rise next month to 26 cents, which equates to a yield of 0.8%. That’s not much, but it beats getting charged to own gold or a gold ETF.

The shares and their dividends continue to deliver better returns than spot gold or the gold ETFs. Year to date alone, Franco-Nevada has returned 19.3% compared to the GLD ETF at only 13.1%.

FNV (White) & GLD (Orange) Total Return—Source: Bloomberg Finance, L.P.

And over the trailing year, FNV has outperformed GLD two-to-one with a return of 66.8% to GLD’s 33.1%.

Buy Franco-Nevada and get paid to own the stock and profit from the Midas Metal along the way.

All My Best,

Neil George
Editor, Income Investor’s Digest & Profitable Investing
Author, Income for Life

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