Dividend-Paying Gold Stocks are Very Alluring After Janet Yellen's Remarks
An important bit of business news on Thursday.
In testimony before the Senate Banking Committee, Dr. Janet Yellen, nominated to replace Federal Reserve Chairman Ben Bernanke, said she favors continuing Quantitative Easing III. That program has the Federal Reserve acquiring $85 billion monthly in Treasury securities and mortgage bonds through expanding its balance sheet, in an effort to keep interest rates low.
And this news now results in dividend-paying gold stocks, such as Yamana Gold (NYSE: AUY), Gold Fields (NYSE: GFI) and Newmont Mining (NYSE: NEM) being attractive as both short-term and long-term investments.
In the short term, the dividend income stream from each makes the stock appealing in a low interest rate environment.
The dividend yield for Yamana Gold is 2.74 percent. For Newmont Mining, it is 2.85 percent. Gold Fields has a dividend yield of 3.04 percent. The average dividend for a member of the Standard & Poor's 500 Index is around 1.9 percent. Ten-year Treasury bonds now yield 2.69 percent.
Over the long term, these stocks are alluring -- as quantitative easing measures should result in inflation, which increases the value of gold assets.
Since 2007, the Federal Reserve balance sheet has expanded from around $700 billion to over $4 trillion. It is increasing at a rate of around $1 trillion yearly, thanks to Quantitative Easing III. Eventually the value of the U,S. dollar should fall from so many more greenbacks being created without the corresponding economic growth.
In an interview with The Wall Street Journal, former Secretary of the Treasury and Secretary of State George Shultz said it's "startling that in the last year, three-quarters of the debt that's been issued has been bought by the Fed and the balance has been bought by other countries, so U.S. citizens and institutions are not on net buying U.S. debt."
"The Fed," he continued, "doesn't have an unlimited capacity because when it buys the debt what it's doing is monetizing the debt. Sooner or later that has got to get out into the economy. Can't be held forever. And when it does in that kind of volume -- as Milton Friedman taught us, inflation is a monetary phenomenon -- it's gonna be hard to control."
In other words, inflation from this will reduce the value of the U.S. dollar and other fiat currencies while increasing the price of gold.
That is long overdue. After Ben Bernanke introduced Quantitative Easing II in August 2010, gold and silver assets rose in value on the exchange traded fund gold, SPDR Gold Shares (NYSE: GLD). It also sent the exchange traded fund for silver, iShares Silver Trust (NYSE: SLV), soaring.
Initially that also happened after Quantitative Easing III was announced in September 2012. But, due to the massive amounts of currencies being created by quantitative easing from central banks around the world, gold and silver markets were overwhelmed. From that, the price of gold and silver soon fell in favor of assets with more liquidity, such as oil.
This is easily seen in the share prices of Yamana, Gold Fields, and Newmont Mining.
For 2013, Yamana Gold is down more than 40 percent. Over the same period, Newmont Mining is off by over 35 percent. Since the first of the year, Gold Fields has fallen nearly 60 percent. Each has jumped in recent market action, however.
For shareholders, with Yellen continuing quantitative easing, the rises should be even more over the long term, with the dividends increasing the total return.
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