Some Ways to Turn Gold Into an Investment

By Travis Johnson, Stock Gumshoe, July 24, 2009


Gold remains one of the most discussed investment themes of the year, with the price of the yellow metal bumping up and down between $900 and $1,000 an ounce — and I hold some gold and some gold mining stocks as well, but it is, in any decent economy, a terrible investment. I consider holding gold to be a way of setting aside savings and ensuring continued buying power if the US dollar should falter significantly or inflation should seize upon us … though neither of those seems like a strong near-term possibility, I do like to be prepared.

That’s the physical metal as a savings vehicle, and as a store of value — and for that purpose I think most folks are probably better off holding a portion of their savings in gold and silver. But it has never felt like an investment to me — the point of investing is to let your money grow, to compound and build upon an initial outlay of capital. Gold mining companies can be investments, because they can turn your capital into something more valuable, and continue to produce more gold every year if they’re run well and are lucky or skilled prospectors.

But the metal? Not so much, it just sits there, has no way of compounding, and generates no income. And most gold companies are expensive if you separate them from the fact that they mine gold — PE ratios tend to be massive because these firms, whether or not they show a current profit, are valued based on the estimates of their reserves and their extraction costs, discounted by whatever degree by extenuating circumstances or fears, such as political risks, permit approval processes, etc.

So I decided to go looking and see if there were investments that might provide some current income and the possibility of compounding value, while also being based to some degree on gold prices, thereby possibly giving a good defense against inflation or currency crises.

There are a few gold companies that do pay dividends — Royal Gold (RGLD), which owns royalty positions in various mines around the world but doesn’t actually mine itself, pays a teeny dividend of just under 1%, more or less in line with big mature gold producers like Newmont, Agnico-Eagle, Gold Fields, Anglo Gold Ashanti, most of whom pay a dividend of between .3-.8%. It is ...

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