Stocks aren’t the only asset that’s been surging. Gold is up big on the year. Here’s what to expect now, as well as a gold-related play that’s paying investors to own it

 

While this blistering stock rally has been hogging the limelight, there’s another asset class that’s quietly been pushing higher.

Since stocks bottomed in March, gold has been grinding north alongside stocks, albeit at a slower pace.

 

 

But the above chart doesn’t tell the whole story …

If we pull out and look at what’s happened in 2020, we see gold handily outperforming stocks. This is the traditional dynamic we’d expect to see in a crisis environment.

 

 

So, where are we with gold today? And what might we expect looking forward? To answer those questions, today, we’re going to turn to expert income investor, Neil George, editor of Profitable Investing.

For all of you suddenly raising your eyebrows at why we’re turning to an income investor to discuss an asset that pays zero income, let me provide some context …

Months ago, as gold began making its move, it caught Neil’s attention. Based on many different factors — interest rates, the value of the dollar, inflation rates, Fed policy, and so on — Neil was bullish on the precious metal.

But as the income-investor he is, rather than recommend it directly, he found a gold-related investment that actually churns out a cash-flow stream. We’ll tell you what it is later in this Digest.

So, enough intro. Let’s check in on what’s been happening with this beloved, shiny rock.

***Tracking gold’s price action through the coronavirus crisis

 

Even though gold has held up well over the last two months, we did see it fall hard in early March as peak fear gripped the markets.

As we noted in a Digest during that time-frame, part of the reason behind the sell-off was plummeting stock prices were crushing traders — especially highly-leveraged traders. This was resulting in margin calls.

Needing cash to meet these margins calls, desperate traders were selling anything with a bid … and gold fit the bill.

Additionally, as Wall Street fled to cash, it boosted the value of the dollar. That’s a headwind for the price of gold.

But as the stock market stabilized, both of these conditions changed, and gold began to do what it traditionally does in uncertain times — outperform.

Here’s how Neil explains this dynamic:

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 U.S. 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 U.S. dollars.

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

***So, where are we today with gold, and what might we expect looking forward?

 

On Friday, gold futures fell about 2% on two pieces of news: one, a general blueprint for how states might reopen their economies, and; two, reports from drug-maker, Gilead, that it’s seeing successful results with its antiviral drug, Remdesivir.

Given that investors typically hold gold as a “chaos hedge,” as the potential for chaos drops, so too does demand for gold.

Of course, it’s far too early to declare Remdesivir as the silver bullet that will knock out COVID-19. So, it’s also too early to say we’re beyond the need for a chaos hedge. And as I write Monday morning, Gold is trending higher.

So, what are the headwinds and tailwinds impacting gold right now?

From Neil:

Gold is gaining from some major fundamental conditions, most of all from the plunge in U.S. 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 …

But Neil is quick to note that a potential end to the coronavirus saga would lure investors away from gold, back into riskier assets.

… 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 U.S. Treasuries, I’m watching for continued bond buying, which will also pull capital from gold investments.

***One thing to be watching for is how recent stimulus action from the Fed impacts inflation

 

Historically, gold helps investors maintain the purchasing power of their wealth during periods of inflation.

Now, substantial inflation hasn’t been anywhere on our radar over the last decade. But given the Fed’s historic stimulus efforts, we find ourselves in an interesting environment today.

On one hand, our immediate economic conditions suggest greater deflationary pressures. After all, crashing oil prices mean your dollar is going further at the pump. Plus, an economy on lockdown basically kneecaps demand for all sorts of consumer goods, which has a downward impact on prices. We’ll tackle this deflationary threat in an upcoming 

Digest.

However, we’re also planting the seeds of longer-term inflation …

Runaway government debt. Massive fiat currency creation that’s backstopped by nothing more than faith in the government. Interest rates slashed to zero.

If you look at history, these types of economic conditions often result in significant inflation. Will that happen again in the U.S.?

We don’t know, but it’s an entirely reasonably possibility. And if it does, it would be a huge additional tailwind for gold.

Whether that plays out or not, Neil is still bullish on gold:

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

***So, what’s the cash-flowing gold play Neil likes?

 

As mentioned earlier, it’s a way to get exposure to gold gains, yet it pays you along the way.

Franco-Nevada Corporation (FNV).

Unlike most gold-related investments, Franco isn’t a mining company. Instead, it acquires and holds royalty interests from gold producers and owns proceeds from gold mining companies.

From Neil:

This means that it doesn’t have to buy and run mines or deal with the related expenses that bring a whole lot of costs and uncertainty to other gold businesses.

It just collects cash from gold production as it streams into the market. If gold goes higher in price, the company makes more revenue. If gold goes down in price, the company makes less, but it still makes money.

And it pays its shareholders their cut of the profits from the stream of gold flowing across its books.

As I write, FNV’s dividend yield is 0.81%. While that isn’t exactly a Dividend Aristocrat, consider the alternative if you want to invest in gold.

Back to Neil:

… 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 …

Neil notes that while a 0.81% yield isn’t much, “it beats getting charged to own gold or a gold ETF.”

Of course, the main reason you’d own FNV is to ride along with gains in gold. And FNV has done that — and then some.

From Neil:

… 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.

Since Neil’s update, FNV as continued to outperform GLD. As you can see below, it’s up 78% over the last year while GLD remains just 33% higher.

 

For more from Neil, click here.

We’ll continue to keep you updated on gold here in the Digest.

Have a good evening,

Jeff Remsburg