Physical Gold & Silver Dividends Offer Investors The Best of Both Worlds (GLD, SLV, IAU, GDX, GDXJ)
Peter Krauth: What if I told you there was a company that paid its shareholders in physical gold? Would a “golden dividend” be enough to get you interested in gold stocks?
If not gold, what about silver?
Neither one of these options even existed when I first started talking about them just three months ago.
But thanks in part to billionaire resource investor Eric Sprott, today’s investors can benefit from a dividend payable in physical gold or silver.
Sprott had sent a letter to silver producers, suggesting they reinvest some 25% of their earnings back into silver, rather than in cash at the bank.
That took my earlier discussion about gold and silver dividends to a totally new level: dividends in kind.
These aren’t paper profits, but real, hold-in-your-hand gold and silver dividends.
For precious metals investors, these “hard asset” dividends make perfect sense.
Today, one innovative gold and silver producer offers investors the best of both worlds.
Finally: Physical Gold and Silver Dividends
In a bid to gain the “first mover” advantage, Gold Resource Corp. (AMEX:GORO), a low-cost gold producer, is launching a gold and silver dividend program on April 10, 2012.
The company has already paid out $41 million in dividends to its shareholders over the past year and a half.
But now they are offering shareholders a unique option by partnering with Gold Bullion International (GBI). GBI is a New York-based precious metals provider to individual and institutional investors, with storage vaults in New York, Salt Lake City, London, Zurich, Singapore, and Australia.
Essentially, GORO shareholders can elect to convert their cash dividends into Gold Resource Corp. “Double Eagles” consisting of one ounce 0.999 fine gold and/or one ounce 0.999 fine silver rounds.
These “Double Eagles” will be drawn from GORO’s physical treasury and placed into the shareholder’s “individual bullion account” with GBI.
Jason Reid, President of Gold Resource Corp. said this new program is “a convenient and simple way of delivering precious metal dividends to shareholders [that] has been a long-term goal of the Company.”
He went on to say: “With innovative assistance from Gold Bullion International, management of Gold Resource Corporation is pleased and excited to announce the launch of the Company’s gold and silver dividend program, a dividend program unlike any other known program offered of its kind.”
Other than the introduction of physically backed gold and silver ETFs, I can’t think of another investment innovation in this sector that could have a major impact on how investors add precious metals into their portfolios.
So, What’s An Eager Gold Investor To Do?
Obviously, you don’t have to get your physical silver and gold by investing in GORO.
Instead, you could just take your dividends from a gold and/or silver producer, then go out and buy precious metals yourself.
What GORO’s new program does is make this whole process a lot simpler for those of its shareholders who prefer the real thing.
So of course that begs the question: Should you buy into Gold Resource Corporation?
Patient and early shareholders of GORO have been well rewarded with a tenfold gain since 2006.
But at today’s share price of $23, GORO’s trading at a P/E of 22.6 – a bit rich for my taste.
And despite the 2.5% dividend, which is generous by gold producer standards, you’d need to own $68,000 worth of GORO stock to receive one gold ounce annually at today’s gold price.
That places Gold Resource out of reach for many.
A Golden Alternative
Investors could look instead at the Market Vectors Gold Miners ETF (NYSEARCA:GDX), which mimics the Gold Bugs Index (NYSE:HUI). It is trading at a P/E of 13, though offering a negligible yield of 0.27%.
This kind of valuation is near historical lows, making precious metals producers (as a group) a very compelling investment right now.
That’s not to say they can’t get cheaper.
But consider this: The very first time GDX traded at today’s prices was back in October 2007.
At the time gold was trading under $800 and silver under $15.
Both metals are at double those levels right now. Yet the gold and silver producers are still trading at October 2007 prices.
This can’t last.
Investor sentiment toward gold is at exceptionally low levels versus the average of the past four years.
But real interest rates (interest you can earn safely minus inflation) are near -3%. That has historically kept gold in a bull market.
On a seasonal basis, we’re also likely at the “trough,” where gold stocks tend to bottom out before heading higher.
How much higher?
Well, if we look at the data from the past decade since gold started its secular bull run, the HUI has averaged 15% gains from mid-March until the end of May.
And gold stocks are at an extreme “undervalued’ level right now: another great contrarian signal.
The past several times we’ve had this kind of setup, gold stocks have absolutely soared, with the HUI Index shooting up over 100% in the ensuing twelve months.
The current price range for GDX – $45 to $50 – has previously acted as both resistance and support.
In my view, the inflection point is close at hand. The odds are in favor of gold stock investors.
My advice: Seriously consider going long gold stocks, which you can easily do by adding GDX.
With such great odds, you could well double your money by this time next year.
In the meantime, keep your eye out for companies that follow GORO’s lead and begin to offer dividends payable in gold and silver.
Even though this development has drawn little fanfare in the press, I believe it’s a watershed moment in precious metals investing.
Related: SPDR Gold Trust (NYSEARCA:GLD), iShares Gold Trust (NYSEARCA:IAU), iShares Silver ETF (NYSEARCA:SLV), Market Vectors Junior Gold Miners ETF (NYSEARCA:GDXJ).
Peter Krauth is a highly regarded market analyst and expert in metals and mining stocks, with a special expertise in energy and resource-related investments. Using the contacts and connections amassed during years of covering commodities investments, Krauth scours the globe to research all commodity sectors, including precious metals, base metals, fossil fuels, alternative energies and agriculture. A one-time portfolio advisor having earned an MBA in finance from McGill University, Krauth is headquartered in resource-rich Canada, where he now focuses exclusively on his research.