Millions of investors have stormed into US Treasuries. Some have even settled for negative yields on Inflation Protected Securities (TIPS). But, they’re making a terrible mistake – because right now, a handful of gold mining stocks offer much more upside and immediate yield than T-bonds.
A Gold-Backed Income Play That Stomps US Treasuries
There’s an old saying that “Gold doesn’t pay interest”, and it’s true. But right now, six well-known gold miners are yielding just as much – or more than government bonds.
Newmont Mining (NEM) yields a solid 1.9% - 48 basis points more than 7-year Treasuries (a basis point is equal to 0.01 so 48 basis points are 0.48).
According to government data from treasurydirect.gov - this has never happened before - going back to 1987, the first year Newmont paid a dividend.
Of course, mining stocks aren’t risk-free. But, in a world where central banks led by the Federal Reserve are gutting the value of their currencies and – let’s be honest – entire governments’ ability to repay debt has come into question, Treasuries aren’t so “safe” either.
A Dirt Cheap Dividend Play – But Not For Long!
GDX offers a basket of mining company stocks. GLD closely tracks the price of gold bullion. And here's where it gets odd:
While GLD has rallied 30% this year, GDX - the gold miners - have only jumped 10%.
click on image to enlarge
So what's going on here? It's hard to say for sure. Investors are piling into physical gold and the SPDR gold trusts. And so far, they've been richly rewarded. But, while holding physical bullion is a better "end of the world" hedge, investors seeking short-term gains should instead focus on the miners.
- How many businesses do you know with profit margins like this? The typical miner has production costs south of $600 an ounce, and is actively selling gold for $1,800+. Newmont (NEM), for example, reached a 27.68% profit margin in Q2, about on-par with red-hot Apple Computer (AAPL) at 25.58%.
- As central banks and sovereign wealth funds continue to accumulate the yellow metal – they will have no choice but to buy mining companies. China, for instance, and other large players have only one way to add to their position in a meaningful way - buy mining stocks. If they attempt to buy bullion alone, they will push the price up too high, too fast.
- Mining stocks are much more liquid than bullion coins and bars. You never have to search for a willing buyer or haul them off to a local bullion dealer. Just point, click and sell from your brokerage account.
What Could Possibly Go Wrong?
Rapid Economic Recovery: If somehow Bernanke’s magic pixy dust stimulates the economy into full recovery – mining stocks could take a hit.
But there is no evidence that a “recovery” is around the corner. And any recovery driven by printed money – by nature – must be inflationary.
Doomsday Financial System Collapse
If the banks and the stock market shut down for months, gold stocks (heck, every stock) will be worthless.
So if you’re one of those Mayan doom and gloomers, ignore this article and get yourself a case of Johnny Walker Black and a good prayer book.
Government Take-Over / Confiscation
It's possible panicked governments will attempt to grab hold of the last remaining gold supply by nationalizing the mines. This type of mass “theft” is more likely than a repeat of 1933, when Americans were commanded to turn over their gold coins. But still it's a long-shot, considering no currency is backed by gold.
Rising Production Costs
If commodities – especially oil, steel and rubber – go through the roof and gold doesn’t keep up, that would impact the mining companies’ profit margins.
Wait a Second! These Stocks Crashed in 2008-2009, Didn’t They?
Yes they did. And investors that stuck to their guns did very well. This time around, gold is trading over 2.5-times higher today than it was in 2008. So barring a crash, that should put a higher floor under well-run mining companies.
Gold is money. It can’t be printed or spread-sheeted into existence. But it can and must be pulled from the earth. Right now some of the world’s most well-run mining companies are trading at a clear discount to gold. And on top of that, six of them pay higher yields than US Treasuries with the added bonus of potentially explosive dividend growth.
So if you believe in the dollar and trust the government to guard its value – whatever little remains – stick with Treasuries. If you are willing to take some short-term risk, select mining stocks could help protect your wealth and pay you a growing stream of dividends in the months ahead.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I am long EKWAX - the Wells Fargo Advantage Precious Metals Fund - in my 401(k).