The Ecstasy of Gold

The yellow metal’s not just for prospectors and speculators but income investors too.

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Gold’s hot. So far this year, the yellow metal has made one new high after another, reaching the $2,700 per ounce range for the first time this past week.

Gold has yet to set a new record in inflation-adjusted terms: The 1980 peak of $800 plus would be the equivalent of nearly $3,500 an ounce by many estimates. But the popular SPDR Gold Shares (GLD) ETF is up nearly 30% in 2024. And there are multiple potential catalysts to push the ETF’s price well beyond $350, a level commensurate with $3,500 plus per ounce gold.

The SPDR ETF holds gold bullion. Investors can bet on gold prices to rise without paying fees to hold the physical metal, or taking on the risk of commodity trading.

The problem is GLD pays no dividend. That makes owning selected major mining stocks a far superior alternative for income investors. And the largest is Newmont Mining (NYSE: NEM), which pays a variable dividend that will rise with earnings.

First, a little history: Since governments began minting and later printing money, the price of gold has been a reliable gauge of its underlying value. Mainly, when governments have over-minted relative to the size of economies—whether the purpose was to fund wars or human welfare—their money’s value in gold has plunged.

Gold’s timeless worth lies in the fact that supplies are limited. There’s still more to be mined. But the US Geological Survey estimates all the gold produced in human history would fit into a cube that’s just 23 meters on each side. Governments can create money but not the gold to back it up.

Up until World War II, major nations typically tied the value of their currencies to the price of gold. But after the devastation from that conflict and the Great Depression that preceded it, even currencies of victorious countries like Britain and France weren’t up to the task.

As a result, leaders of 100 plus countries met in 1944 at Bretton Woods, New Hampshire. Their purpose: To forge a new global monetary order to facilitate the post-war flow of trade and investment. The US agreed to back the dollar with gold at a convertibility price of $35 per ounce. And every other country pegged the value of their currency to a set amount of US dollars.

Bretton Woods restored global financial stability at a critical period. But by the late 1960s, accelerating inflation made it increasingly impossible for the US to defend the dollar with gold. So President Nixon ended convertibility in August 1971, one of several policy shifts that were known as the “Nixon Shocks.” And the price of gold has been set by market forces ever since.

If nothing else, the metal’s past 53 years have been a study in volatility. During the 1970s, the price rose relentlessly with inflation. It crashed in the early 80s, as Federal Reserve Chairman Paul Volcker jacked up interest rates and plunged the global economy into a deep recession.

Later in the same decade, loosening monetary policy pushed gold back to $800 plus, before crashing again with the stock market in October 1987. Low inflation kept prices mostly range bound during the 1990s and ‘00s. But since the 2007-09 Financial Crisis, the metal has resumed a general uptrend, breaking decisively over $2,000 an ounce this year.

What drives gold prices? In the near term, investor confidence, specifically in the direction of the economy and monetary policy. Longer-term, it’s the underlying value of paper money relative to actual wealth.

Gold’s rally this year is rooted in two major confidence-shaking factors. First, the Federal Reserve has pivoted from two-and-a-half years of “higher for longer” interest rates to cutting its benchmark Fed Funds rate. That’s raised questions about whether the central bank will tolerate higher inflation to keep employment strong.

Second is the presidential election. The only thing certain about the outcome in November is roughly half the country will be in opposition to the government. But both presidential candidates’ tax and spend proposals will boost federal budget deficits. Both major parties have embraced tariffs and other restrictions to trade, which increase inflation. And one candidate would limit Federal Reserve independence, historically a formula for currency debasement in countries like Argentina.

As for the longer-term, higher interest rates have increased underlying scarcity—hence reduced the buying power of paper money—by discouraging investment across multiple sectors. That includes housing, the cost of which is now a major factor keeping official inflation elevated. Ditto oil and gas development, which has been further depressed the past several years by restrictive regulation and volatile selling prices.

Bottom line: There are many reasons to expect gold prices to go significantly higher in coming years. And that means higher earnings and dividends for major mining companies like Newmont Mining (NYSE: NEM).

Newmont pays a “base” dividend of 25 cents per quarter. The variable portion rises with earnings, and therefore gold prices.

Currently, the variable portion is zero. That’s because the company has been using spare cash to cut debt since closing last November’s merger with Newcrest Mining. But that effort is winding up.

Last week, Newmont announced the sale of a mine in Ghana for $1 billion, bringing total asset disposal proceeds to $1.8 billion plus versus a target of $2 billion. That means debt is likely to be less than $4 billion next year, well below management’s long-term goal of $5 billion.

Newmont also expects to increase production and lower operating costs, pushing up 2025 free cash flow after base dividends to $2.1 billion—even if gold prices don’t rise from here. That’s plenty to fund a stock buyback and a variable dividend equal to the 2021-22 peak of 30 cents a share.

A rising gold price the next few years could boost Newmont’s dividend 2 to 3 times its previous peak of $2.20—as well as potentially double the share price. That’s a great way for conservative income investors to enjoy the ecstasy of gold.