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As precious metals investors know, gold (GLD) is a store of value. And as I describe in The 5 Fundamentals of Building a Retirement Portfolio, stores of value "provide a type of protection that transcends any type of protection afforded by investments that pay out in fiat currencies." Especially in an environment in which unconventional monetary policy reigns supreme, gold will play an important role in many investors' portfolios.

But one thing an investment in gold does not do is generate income. In fact, unless an investor keeps his or her gold locked up at home, the investment will actually be cash flow negative over time. This is because there is a cost associated with keeping your gold in a safe deposit box at a bank or with a precious metals depository.

Over the past few years, I have read all sorts of opinions about the price to which gold will eventually rise in fiat currency terms. Should gold ever achieve some of the very high price targets I have seen, holders of physical gold will incur ever-higher storage costs along the way. If that happens, will you have sufficient cash to pay the storage costs, or will you have to sell some of your gold to do so? One way in which you can put the odds in your favor that you will not have to sell gold to pay your storage costs is to diversify a portion of your gold exposure into Newmont Mining.

In general, I am not a big fan of owning gold miners as the principal means of gaining gold exposure. I would rather own the physical metal. As the chart below illustrates, over the past few years, some of the larger gold miners as well as the popular Van Eck Global Market Vectors Gold Miners ETF (GDX) have been serial underperformers relative to the price of gold.

Gold Price in US Dollars Chart

Gold Price in US Dollars data by YCharts

If I am going to have gold exposure in my portfolio, I want to be sure that I benefit from gold's role as a store of value. With that said, if having exposure to one of the larger miners can do something unique for my portfolio, I will certainly give it due consideration. When I think about ways to generate enough cash from an investment portfolio to pay for gold storage costs, the first place I am tempted to look is at the stocks or bonds of the more established gold miners.

From an equity perspective, if I think that a miner's stock will generally remain correlated to gold in terms of price direction (though not necessarily the magnitude of the price moves) and it pays a solid dividend, then I will consider purchasing the stock. In terms of a gold miner's bonds, if the credit risk and yield are sufficient, and I have adequate liquidity in the remainder of my portfolio allowing me to ignore the mark-to-market movements of an individual bond, then I will consider purchasing the bonds.

When perusing bonds of some of the larger gold miners, there is an opportunity to pick up yields of 5.162% and 6.469% in AngloGold Ashanti Holdings Finance's (AU) 2022 and 2040 maturing notes (CUSIPs 03512TAC5 and 03512TAB7). I know that 2040 may be too far into the future for some investors to think about, but remember to consider the following:

1. If you plan to be a "long-term" investor in gold and want to match your storage costs to cash flows with ties to gold, then a longer-term bond at a yield with which you can live is worth considering.

2. When buying an individual bond that matures at par, as long as you purchase it at a yield you find desirable and have the liquidity available to avoid having to sell it should its price decline for a period of time, then, again, it's worth considering.

While I think the bonds are an interesting proposition (I do own a couple of gold miners' CUSIPs), when attempting to match future storage costs to cash flows, my preference is to look at stocks that could experience growing dividends over time. This way, rather than potentially having to worry about investing more money into bonds to keep cash flows consistent with rising storage costs, I have the opportunity of not having to increase my investment over time in order to keep up with rising storage costs.

Barrick Gold (ABX) has announced some generous dividend increases in recent years and currently sports a yield of 2.37%. At this time, the company pays a 20 cent quarterly dividend after raising it 33% earlier this year. While I think there is scope for the dividend to grow over time, in this day and age of perpetual uncertainty, I am searching for as much certainty as I can possibly find. Therefore, I cannot help but be drawn to Newmont Mining's (NEM) gold-price linked "Enhanced Dividend Policy."

Newmont Mining's dividend policy is currently such that as the price of gold fluctuates, so too will the dividend. If you are a believer that gold prices are going higher over time, then Newmont's dividend policy can help you plan for the rising storage costs you will incur. In the table below, you will see Newmont's proposed annualized dividend relative to certain average realized prices of gold. I also included the yield on cost based on Newmont's recent closing price of $45.68. I say "proposed" because although the company is telling investors the amounts it intends to pay at certain gold prices, the "Enhanced Dividend Policy" is non-binding and the dividends still have to be declared.

Average Realized Gold Price

Annualized Dividend

Yield On Cost At $45.68 Per Share

$1,100

$0.40

0.88%

$1,200

$0.60

1.31%

$1,300

$0.80

1.75%

$1,400

$1.00

2.19%

$1,500

$1.20

2.63%

$1,600

$1.40

3.06%

$1,700

$1.70

3.72%

$1,800

$2.00

4.38%

$1,900

$2.30

5.04%

$2,000

$2.70

5.91%

$2,100

$3.10

6.79%

$2,200

$3.50

7.66%

$2,300

$3.90

8.54%

$2,400

$4.30

9.41%

$2,500

$4.70

10.29%

Exactly how much Newmont Mining stock would you have to own to pay for your gold storage costs over time? Let's take a look: In the table that follows, I outline the annual costs at various gold prices associated with a $100,000 investment in gold, using 0.50%, 0.75%, and 1.00% as the annual storage fees. I assume a $1,700 cost basis on the price of a $100,000 investment.

Gold Price

$100,000 Investment at $1,700/oz.

Storage Fee of 0.50%

Storage Fee of 0.75%

Storage Fee of 1.00%

$1,100

$64,705.88

$323.53

$485.29

$647.06

$1,200

$70,588.24

$352.94

$529.41

$705.88

$1,300

$76,470.59

$382.35

$573.53

$764.71

$1,400

$82,352.94

$411.76

$617.65

$823.53

$1,500

$88,235.29

$441.18

$661.76

$882.35

$1,600

$94,117.65

$470.59

$705.88

$941.18

$1,700

$100,000.00

$500.00

$750.00

$1,000.00

$1,800

$105,882.35

$529.41

$794.12

$1,058.82

$1,900

$111,764.71

$558.82

$838.24

$1,117.65

$2,000

$117,647.06

$588.24

$882.35

$1,176.47

$2,100

$123,529.41

$617.65

$926.47

$1,235.29

$2,200

$129,411.76

$647.06

$970.59

$1,294.12

$2,300

$135,294.12

$676.47

$1,014.71

$1,352.94

$2,400

$141,176.47

$705.88

$1,058.82

$1,411.76

$2,500

$147,058.82

$735.29

$1,102.94

$1,470.59

Now that we know how much it will cost to store gold using various storage fees and various gold prices, let's figure out how much Newmont Mining stock an investor would have to own to pay off storage fees of 0.50%, 0.75%, and 1.00% using the dividend outlined in the "Enhanced Dividend Policy." Remember that all figures are based off a $100,000 investment in gold made at $1,700 per ounce.

Gold Price

Storage Fee of 0.50%

Annualized Dividend

Number of Shares to Own (rounded up to nearest share)

$1,100

$323.53

$0.40

809

$1,200

$352.94

$0.60

589

$1,300

$382.35

$0.80

478

$1,400

$411.76

$1.00

412

$1,500

$441.18

$1.20

368

$1,600

$470.59

$1.40

337

$1,700

$500.00

$1.70

295

$1,800

$529.41

$2.00

265

$1,900

$558.82

$2.30

243

$2,000

$588.24

$2.70

218

$2,100

$617.65

$3.10

200

$2,200

$647.06

$3.50

185

$2,300

$676.47

$3.90

174

$2,400

$705.88

$4.30

165

$2,500

$735.29

$4.70

157

Gold Price

Storage Fee of 0.75%

Annualized Dividend

Number of Shares to Own (rounded up to nearest share)

$1,100

$485.29

$0.40

1214

$1,200

$529.41

$0.60

883

$1,300

$573.53

$0.80

717

$1,400

$617.65

$1.00

618

$1,500

$661.76

$1.20

552

$1,600

$705.88

$1.40

505

$1,700

$750.00

$1.70

442

$1,800

$794.12

$2.00

398

$1,900

$838.24

$2.30

365

$2,000

$882.35

$2.70

327

$2,100

$926.47

$3.10

299

$2,200

$970.59

$3.50

278

$2,300

$1,014.71

$3.90

261

$2,400

$1,058.82

$4.30

247

$2,500

$1,102.94

$4.70

235

Gold Price

Storage Fee of 1.00%

Annualized Dividend

Number of Shares to Own (rounded up to nearest share)

$1,100

$647.06

$0.40

1618

$1,200

$705.88

$0.60

1177

$1,300

$764.71

$0.80

956

$1,400

$823.53

$1.00

824

$1,500

$882.35

$1.20

736

$1,600

$941.18

$1.40

673

$1,700

$1,000.00

$1.70

589

$1,800

$1,058.82

$2.00

530

$1,900

$1,117.65

$2.30

486

$2,000

$1,176.47

$2.70

436

$2,100

$1,235.29

$3.10

353

$2,200

$1,294.12

$3.50

370

$2,300

$1,352.94

$3.90

347

$2,400

$1,411.76

$4.30

329

$2,500

$1,470.59

$4.70

313

As you can see, as the price of gold rises, the number of shares of Newmont Mining required to pay off the rising storage fees decreases. This is due to Newmont's dividend increasing at a faster rate than the price of gold. Similarly, in a declining gold price environment, the dividend will decrease at a faster rate than the price of gold, thereby increasing the number of shares required to pay storage fees.

You might be wondering how an investor should decide the number of shares to purchase. The price of gold off of which I would base the Newmont Mining investment is $1,500 per ounce. The $1,525 to $1,550 region has represented major support for the price of gold on two occasions over the past year, and for those investors bullish on gold going forward, that price range is one that should be expected to hold.

Gold Price in US Dollars Chart

Gold Price in US Dollars data by YCharts

Therefore, using $1,500 as the guide, an investor with storage fees of 0.50% would purchase 368 shares, an investor with storage fees of 0.75% would purchase 552 shares, and an investor with storage fees of 1.00% would purchase 736 shares of Newmont Mining. At the recent closing price of $45.68, it would cost $16,810.24 to purchase 368 shares, $25,215.36 to purchase 552 shares, and $33,620.48 to purchase 736 shares (all ex-commissions). This means that for those investors paying storage fees of 0.50%, 14.39% of their total gold exposure would be in Newmont Mining. Those investors paying storage fees of 0.75% and 1.00% respectively would have 20.14% and 25.16% of their gold exposure in Newmont Mining. Remember that this doesn’t take into account taxes as the tax rates are set to change in a few weeks. After Congress decides what the dividend tax rate will be going forward, the number of shares will need to be adjusted accordingly.

Additionally, investors who want to keep the dividend payout from Newmont Mining in line with their storage costs would have the option of selling some of their shares as the price of gold rises. Otherwise, by holding the entire position, the dividend from Newmont would eventually exceed the storage costs, generating positive cash flow on the entire gold exposure in the portfolio.

Let's not ignore the danger that gold prices break below $1,500. In the event of a bear market in so-called "risk assets" causing margin calls among big institutional investors, the risk of a big drop in the price of gold would increase significantly. When you have investors with positions in stocks and gold, and margin calls start rolling in on the stocks, it is entirely possible that gold positions are trimmed in order to fund the margin calls. This could cause strong downward pressure on the price of gold during the next bear market in "risk assets."

Under that scenario, for those gold investors who believe that holding a store of value such as gold is imperative for a portfolio, as you hold the gold position and the price continues to decline, there is the risk that storage costs begin to exceed the cash flow from Newmont's lower dividend payouts. If that happens, you could purchase more Newmont Mining stock, but then your total allocation to gold equities versus the physical metal would quickly shift away from your original allocation. Instead, to keep the miners-physical gold allocation from becoming too skewed as a result of having to make large additional purchases of equity to fund the storage costs, you have three other options.

1. Sell covered calls on your position to bring in enough extra cash to fund the difference between storage costs and the dividend.

2. Buy bonds to supplement the income from the dividend. As the price of gold declines, chances are quite good that the spreads of the corporate bonds of gold miners would be widening. This means that at precisely the time you would want to start buying bonds to fund the difference between storage costs and the Newmont Mining dividend (when the price of gold drops below $1,500), bond yields on the gold miners would likely be heading higher. And bonds yields heading higher around the time when you are looking to buy is a good thing. The higher the yield, the better.

3. Fund the difference between the dividend payout you receive and the cost of storing your gold with any available cash you have. This is meant to be a temporary Band-Aid to buy you time for the price of gold to rebound. If it appears the price of gold is going to stay below $1,500 for an extended period of time, then I would prefer going with options number one or number two.

Of course, investors should not make an investment decision based on the dividend yield alone. There are risks associated with an investment in Newmont Mining, and I would like to mention three: rising costs, lower production, and geopolitical risks. While rising costs and lower production are certainly big risks in a stagnant or declining gold price environment, rising gold prices will help to offset many concerns investors have surrounding those two risks. Chief Financial Officer and Executive Vice President Russell Ball perhaps best summarized this in the Q3 2012 earnings conference call when he stated, "the strength of the balance sheet and our ability to sustain the current dividend is a function of the gold price . . ." If you are a gold bull, I think you should be more concerned with risks to the fundamental gold investing thesis than to current challenges that Newmont executives are already aware of and working through regarding cost pressures and production issues.

If the fundamental thesis supporting the price of gold remains strong, then as Newmont works through its cost-reduction strategies and the price of gold goes higher, the downward pressure on the stock from concerns about rising costs and lower production should lessen. In a nutshell, higher gold prices are the most important factor in the Newmont Mining fundamentals equation. If gold prices keep going up, then investors will focus less on current costs and production concerns and instead focus more on simply getting exposure to gold. Given that a large number of investors get their gold exposure through the miners, that will provide additional support to Newmont Mining's share price (along with a rising gold price). In a declining gold price environment, however, cost and production challenges will only increase as margins get squeezed and miners even contemplate slowing production in an attempt to support the price of gold. This begs the question, what will gold prices do?

Before I touch on gold prices, let me remind readers that the only reason investors should consider using Newmont Mining's "Enhanced Dividend Policy" as a solution to concerns about rising storage costs is because they believe gold prices are going higher. If you don't believe rising gold prices are on the horizon, you wouldn't be contemplating taking advantage of the opportunity that Newmont's dividend policy provides investors. With that said, I will still share a few thoughts on gold prices by asking a series of questions:

1. In an environment in which the primary solutions put forth by central banks for solving today's woes involve bailouts and money-printing, why would investors (governments included) not continue to allocate cash toward gold?

2. When sovereign bond yields are as low as they are and set to remain low for years to come, why wouldn't investors take advantage of the lower opportunity cost of owning gold over sovereign bonds?

3. If the history of fiat currency is such that once a currency goes fiat, it eventually goes away, why wouldn't investors continue to allocate ever-more money to gold?

4. When those in power show an affinity toward increasing the money supply and running very large yearly fiscal deficits, why wouldn't investors continue to turn to stores of value to protect their wealth? And given its long history as a store of value, gold will be at the top of many people's lists.

Those four questions are all the fundamental analysis you need to do on gold. There isn't enough gold in the world to satisfy the investment demand that would arrive under a true breakdown in confidence of fiat money. Whenever you want to know gold's future as a store of value that attracts strong investment flows, think about the answers to those four questions. And as gold goes, so goes Newmont and its "Enhanced Dividend Policy." Newmont Mining will work through its cost and production challenges. But the true driver of returns for Newmont shareholders will come from the performance of the price of gold. If the price of gold goes much higher, as many think it will, then Newmont's share price and dividend will eventually go along for the ride.

On a closing note, let's revisit the first table in this article, which shows the dividend Newmont Mining intends to pay at certain gold prices, along with the yield on cost that would accompany such a dividend using a cost basis of $45.68. At $2,500 per ounce, Newmont Mining intends to pay a $4.70 annualized dividend. That is a 10.29% yield on cost at the recent closing price of $45.68. If gold goes to $2,500, do you really think Newmont Mining will be yielding 10.29%? I don't think there is a chance of that happening. Let me be conservative and say it will yield 6% with gold at $2,500 per ounce. That equates to a stock price of $78.33, over 70% higher than where it is today. Using forward earnings estimates of approximately $5 per share, at $78.33, you would have a stock valued at a reasonable 15.67 times current forward earnings estimates. Moreover, what do you think the chances are that Newmont's earnings estimates don't end up significantly higher should gold rise another 46% from where it is today? I'll go with slim-to-none.

At a gold price of $2,500 per ounce, we would instead start hearing a lot about the third risk to Newmont's business that I mentioned above: geopolitical risk. In fact, this would be a big concern for all miners. As the metals being mined rise in fiat currency terms, governments with large spending initiatives may decide it makes sense to either seize the mines and kick the foreign companies out or implement prohibitive taxes and royalty payments that make it all but impossible to maintain strong profits. That's the business risk I would be most concerned with in a fast-rising gold price environment.

If you are worried about higher storage costs due to rising gold prices, then Newmont Mining and its "Enhanced Dividend Policy," is an opportunity that is difficult to ignore. In a world of persistent uncertainty, it's nice to have at least one gold miner willing to stick its neck out a bit with its dividend policy and help investors plan for the future.

Source: Let Newmont Mining Pay For Your Gold

Additional disclosure: I am also long gold as well as NEM and AU bonds.