Futures for Canada's main stock index rose this week supported by gold prices that jumped to one-week high. Awaiting Bank of Canada's interest rate decision, the dollar and U.S. Treasury yields slipping were all contributing factors to stabilizing gold prices.
As markets remain volatile at the end of 2021, it will be a while before gold prices are able to gain any traction. Gold ETF edged higher this week in conjunction with bullion prices. Yields moved higher, but gold stocks remain undervalued.
In such periods of uncertainty and lower prices, investing in mining stocks of Canadian junior gold miners, mid-tier and larger exploration companies is a good strategy for portfolio diversification.
Streaming and loyalty companies like Royal Gold or Wheaton Precious Metals are a safe bet right now. They are different than regular gold miners as they give cash up front to miners for the right to buy gold, silver, and other metals in the future at reduced rates. This is a deal that benefits both parties as the miners can use the cash to invest in their businesses while the streamers lock in low prices for years to come.
In June 2021, Royal Gold paid $100 million (with an additional $10 million commitment) for gold produced from the NX Gold Mine in Brazil. Under the agreement, the company will pay 20% of the gold's spot price up to certain target production levels and 40% thereafter. Royal Gold has locked-in wide margins and bypassed many of the risks inherent to the mining process.
Such an approach has allowed the company to increase its dividend annually for 20 years amid a highly volatile precious metals space. Its dividend yield of 1.4%, which has remained stable.
Wheaton Precious Metals takes a similar, approach. Its portfolio is spread evenly across gold and silver. Gold makes up around 60% of revenues and silver 36% (other metals account for the rest). Wheaton also has 24 operating mine investments and nine development projects. Its more concentrated approach focuses on larger deals with active mines. It has mine investments in seven countries.
Wheaton's dividend, which is based on the company's performance. Essentially, it looks to pay out 30% of the average cash flow generated by its business over the past year. However, that, by design, means that the dividend will go up and down over time. The current yield is 1.5%, but that's clearly not a great indication of what investors can expect over the long term. The positive of this dividend approach is that when Wheaton does well, so will investors.