Of the many ways Donald Trump plans to make America great again, addressing the trade deficit is at the forefront. One of his earliest acts in office, for example, was to reject the Trans-Pacific Partnership. NAFTA also seems to be in the president’s crosshairs. In fact, addressing trade issues was one of his chief concerns during the recent G-20 summit.
Where does that leave investors? For some, the trade deficit instills a sense of fear — one grounded in concern of a weakening dollar. Those who find themselves in this category shouldn’t, consequently, retreat from the market. Instead, they should recognize it as an investment opportunity — one that glitters. So let’s turn to three leading gold investment options: Royal Gold (NASDAQ: RGLD), Franco-Nevada (NYSE: FNV), and the SPDR Gold Trust ETF (NYSEMKT: GLD).
Worries of the trade deficit and a weakening dollar are certainly nothing new, since the dollar has fallen throughout the first half of 2017. According to the Dollar Index, the dollar has shed more than 8% in value. Measuring the U.S. dollar against several foreign currencies — the euro, Japanese yen, Pound sterling, Canadian dollar, Swedish krona, and and Swiss franc — the dollar index provides a glimpse into how the rest of the world perceives the U.S. economy. Gold, conversely, has risen roughly 8.5% as of this writing. In this time, royalty and streaming companies, Royal Gold and Franco-Nevada, and the SPDR Gold Trust ETF have also prospered.
The regal option
With gold accounting for 85% of its total sales in fiscal 2016, Royal Gold is one company which could withstand a weakening dollar. Although some gold stocks may not come away unscathed, it’s unlikely that many of the industry’s leading miners would suffer. So the company’s portfolio of 38 producing properties which include royalty and streaming agreements with leading gold miners, Barrick Gold (NYSE: ABX), Yamana Gold (NYSE: AUY), and Goldcorp (NYSE: GG) among several others, position Royal Gold well to handle the possible rocky road ahead.
Over the past five years, Royal Gold has averaged — in the face of volatility in the price of gold — high gross and operating margins of 90.4% and 39.4%, respectively, according to Morningstar. This, in turn, has helped the company to generate strong positive operational cash. Moreover, the rising and falling price of gold has not adversely affected the company’s ability to increase its dividend.
As of this writing, the average price of gold year to date is $1,236.49. Should the trade deficit effect a weakening in the dollar, the price of gold, presumably, would rise — something from which Royal Gold could very well benefit.
Portfolio strength means a lustrous opportunity
Franco-Nevada, like Royal Gold, would most likely shrug off a weakening dollar. The company has 46 mineral-producing assets and 41 projects in the advanced phase of development. But this belies the depth of the company’s portfolio.
In total, Franco-Nevada’s portfolio includes 339 assets in varying phases of development and representing more diversity than only gold — platinum group metals, silver, uranium, and oil and gas, to name a few. The assets, moreover, are geographically diversified, which further shields the company from a weak dollar.
A strong portfolio is important, but it’s not enough. Turning to its financials, we find more reasons the company could withstand a downturn in the value of the dollar. At the end of Q1 2017, the company reported no debt and $283 million in cash on its balance sheet. And it wouldn’t be surprising if the company continues to grow its cash position. Since it’s not responsible for the continual capital expenditures gold miners must contend with, Franco-Nevada is able to convert its operational cash flow to free cash flow. Over the past five years, for example, the company has increased its free cash flow at a compound annual growth rate of 21.3%.
A glittering ETF
For those looking to mitigate the risk of investing in one company, the SPDR Gold Trust provides a more conservative approach. In fact, it affords investors the opportunity to avoid companies altogether, for the fund’s holdings include physical gold and, occasionally, cash. Over the past 10 years, the fund has been successful in achieving its stated objective: to track the price of gold.
Although this gold ETF is not a stock, it does trade like one. Investors must remember to take into consideration the ETF’s expense ratio — in this case 0.4%. Also, they should recognize that the ETF, unlike Royal Gold and Franco-Nevada, doesn’t offer a dividend. Despite the annual expense of holding the ETF and its nonexistent yield, however, it affords investors who are afraid of a weakening dollar an excellent option.
Most people are probably not losing sleep at night in fear of the trade deficit, but that doesn’t mean concerns of a weaker dollar on the horizon are unreasonable. In fact, those fears may have intensified recently in light of the U.S.-China trade talks that many have deemed unproductive.
For those finding themselves with pits in their stomachs at the prospect of a weaker dollar, gold could be the remedy. In this vein, Royal Gold and Franco-Nevada, two leading royalty and streaming companies, offer compelling options. Both companies have strong portfolios and have a proven history of generating strong cash flows. And for those with a more conservative bent, the SPDR Gold Trust ETF represents a glimmering possibility.
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