How To Invest In Gold And Have It Pay You Income
Since early 2016, gold has been one of the hottest-performing commodities in the market. Gold is up nearly 25% year to date, and the reasons why should not be a surprise.
But before I get into the bullish case for gold, I must make one thing clear. Longtime readers know that I am no basement-dwelling gold bug. I don’t hide bars in my backyard waiting for the Apocalypse, and I don’t consider gold a good long-term investment.
Simply put, when it comes to investing, I look for well-run companies and nice fat dividends. That’s where physical gold falls short. It doesn’t pay a dividend.
I do, however, find one subniche in gold to be a great way to make short- and medium-term profits. And in a moment, I’ll share the details.
But before we get to that, I want to make sure you’re caught up to speed on the basic case for gold.
Most investors are familiar with the basic arguments for gold — it serves as an inflation and currency hedge, performs well in low-interest environments and is a store of value in times of uncertainty. Right now, all of these factors are at play, creating an incredibly bullish environment for the Midas metal.
One of the largest drivers for gold is that negative interest rates have become the go-to policy for countries around the world. Japan, Switzerland, Sweden and Denmark are just a few of the countries issuing debt that require the lender to pay interest. It’s a backward concept, but these negative interest rates are causing investors to flock from government bonds into hard assets such as gold. Why buy a bond and lose principal to begin with or store money in a bank account and pay interest on your deposit when you can buy gold and maintain your wealth?
The amount of negative-yielding assets has grown exponentially since 2014. Right now, close to a quarter of all the fixed-income assets in the world have a negative yield. Just check out the chart below!
When looking at the increase in negative yield assets, it is no wonder hard assets have seen such a spike in demand.
Now you might be thinking…Why didn’t gold rise in 2014 or 2015, when negative rates started becoming the norm?
Well, there is another factor we need to bring in here — the value of the U.S. dollar.
When the dollar is strong, gold is weak.
In 2014 and 2015, the dollar became strong. This acted against the price of gold, even though negative interest rates were becoming popular.
It wasn’t until 2016, when the dollar became weaker, that gold started to gain value.
When the dollar began to fall, investors started scooping up gold. With added uncertainties from the global economy, such as the Brexit and other tensions between countries, investors began looking for safety by purchasing precious metals.
It is always important to remember the many forces working on the price of gold. Right now, the biggest factors are the following:
- The U.S. cannot raise interest rates because the economy isn’t healthy enough
- Countries are implementing negative interest rates in order to stimulate growth
- Investors are weary of the economy and politics (e.g., Britain leaves the EU, so what else is going to happen?).
Even though gold has been one of the hottest commodities in 2016, I believe there is further room for growth considering all of the uncertainties in the world economy.
Here is my favorite way to get exposure to gold while earning an income payment on the side!
How to Play the Modern-Day Gold Rush — and Get Paid!
The best way to gain exposure to gold is not by holding gold bars or bullion but rather by purchasing this unique type of company that specializes in precious metals.
If you are thinking of gold miners, you are on the right track, but this type of company is better, and I’ll show you why!
There is a little-known way that gold mining companies raise money without contacting banks, venture capitalists or other big-name miners. They are a special type of company that gives miners the money they need in return for a large percentage of the gold they excavate from the ground.
These types of companies are some of the most profitable businesses you can invest in because of the way they keep costs low while receiving precious metals at an extremely discounted rate. They are called “streaming” companies (or said another way, these are precious metal royalty plays). And over the past few years, they gave investors decent returns even while the price of gold was down.
The secret behind streaming companies is they merely finance the miners and do not take on any operational risks associated with mining. They don’t worry about environmental permits or disasters, purchase new bulldozers or tend to faulty blasting situations.
They are simply a front office with a few desks that collect receipts for the mine’s haul for the day.
Streaming companies are a great investment for individual investors interested in precious metals because of their low risk profile and ability to generate returns even if the price of the underlying asset begins to fall.
Say you are interested in a certain mine because you have reason to believe there are large deposits in the ground. This particular mine is owned by Barrick Gold but was financed by a streamer. When it comes time to invest, you can put your money in Barrick OR you can invest in the streaming company that provided the funding for Barrick to start the mine.
No matter which company you choose, you will see returns associated from the mine you are interested in. However, the streamer makes the better choice for a couple of reasons. The biggest benefit in buying the streamer is that you are protected in case Barrick files for bankruptcy.
Remember, the streaming company provided the funding for Barrick in terms of debt, which means that the streamer is first in line for any collateral in case of bankruptcy. As a shareholder of the streaming company, the collateral from Barrick’s bankruptcy would contribute to the bottom line of the streaming company’s financial statements.
On the other hand, if you owned shares of Barrick, you would most likely lose all of your money.
You can see why streaming companies are so valuable!
Here’s My Favorite Streaming Play Right Now
One of the best streaming companies out there is Franco Nevada Corp. (NYSE: FNV), based out of Toronto, Canada.
Their portfolio consists of approximately 340 properties in various stages of development — from exploration to production. This includes geologists searching for the best places to mine, the construction of the mine itself and actual excavation.
Compared with the biggest-name gold miners in the world, Franco Nevada has significantly outperformed even when the price of gold was on a steady decline.
Take a look at the chart below.
As you can see, Franco Nevada was not affected by the fall in the price of gold that started in 2011, like the other major miners were.
The VanEck Vectors Gold Miners ETF is a collection of the largest gold mining companies in the world, and their trend represents the typical pattern for big-name companies such as Barrick Gold and Goldcorp.
An investment in Franco Nevada during that time would not only have saved you from losing money but would have also brought significant returns.
Again, this is due to the streaming business model. While most miners are currently posting negative returns and margins, Franco Nevada remains profitable for shareholders. They are a $13.3 billion company with little debt and only 29 full-time employees — a handful of geologists, financial analysts and a management team. With low operational costs, Franco Nevada makes a great choice for investing in gold. Best of all, they pay a 1.31% dividend!
Whether or not gold rises in value, streaming companies make a great investment if you want exposure to precious metals.
Their low-cost business model and access to cheap precious metals make them extremely profitable and allow for the redistribution of cash to shareholders — all while appreciating in value!
If you are keen on gold, this is my favorite way to play it. It’s a nice way to get exposure to gold and get paid at the same time!
Here’s to growing your income,