President Donald Trump wants lower interest rates... and he wants them now.
In a recent tweet, he referred to the Federal Reserve's monetary policies as an "anchor wrapped around [the economy's] neck."
And the Fed is listening...
The U.S. Federal Reserve cut its benchmark interest rate in July. This marked the first time since 2008 that the Fed has cut rates.
But this wasn't enough for Trump... or for investors. U.S. markets tumbled after the Fed's announcement because people were hoping to hear more comments on future cuts.
You see, the Fed uses interest rates like a brake pedal. When the economy is getting too hot, it presses the brakes – and raises interest rates.
When things aren't looking good, the Fed lets off the brakes. That means it lowers interest rates. And that makes it easier for businesses and individuals alike to get loans.
Now, all of this is supposed to be in pursuit of the Fed's "dual mandate." All that means is that the Fed is focused on two primary factors...
They are 1) the employment rate and 2) inflation. And right now, both of those look pretty good.
Inflation is hovering just below 2%. And the unemployment rate – as measured by the Fed – is at multidecade lows.
On the surface, the market looks pretty good, too. The S&P 500 Index recently hit new highs. And the trend looks positive.
But now, markets are pricing in at least two more interest-rate cuts this year to speed up the economy. So why is the Fed cutting rates?
It's simple: There's a lot of uncertainty in the markets...
The U.S.-China trade war, Brexit, and even tensions with Iran all have investors on edge. With a lot of uncertainty and risk in the markets, investors need to make sure their portfolios are protected... And they're looking for ways to hedge themselves.
So far in 2019, gold is up more than 12%. It recently hit a level not seen in more than five years.
So global uncertainty is leading to increased demand for gold... But the Fed's actions could increase demand even more. You see, since gold doesn't pay any interest, it's a better investment than interest-paying assets like Treasuries.
Low-interest-rate environments (like the one we're in now) create more demand for gold... which is great news for today's company.
Royal Gold (Nasdaq: RGLD) is a great way to take advantage of the recent spike in demand for gold.
While gold miners have to spends tons of cash to open and operate a mine, Royal Gold does things differently...
You see, it's a "royalty and streaming" company. We covered another royalty company – Franco-Nevada (FNV) – in an earlier addition of Stock of the Week from December.
These companies provide upfront capital to mine operators.
In return, they receive a percentage of sales (the royalty) or the right to purchase metals at a predetermined cost (the stream). They collect revenue based on a mine's production – not its profitability.
As part of their agreements, royalty and steaming companies receive a fixed percentage of revenue (or a fixed metal price), regardless of the price of precious metals. Plus, they aren't exposed to risky capital expenditures ("capex") such as ongoing exploration and production costs.
And yet, they still get a cut of any new discoveries the miner makes on the property in which they hold a royalty.
In total, Royal Gold holds royalties in nearly 200 mines in some of the world's highest-quality gold regions.
One of Royal Gold's most valuable royalties is on the Peñasquito mine in Mexico. The company owns a 2% royalty on the mine, which features some of the world's largest gold, silver, zinc, and lead reserves.
This is an open-surface mine that contains more than 9 million ounces of gold reserves and more than 500 million ounces of silver reserves. It also has more than 3.5 billion pounds of lead reserves and nearly 8 billion pounds of zinc reserves.
Mining giant Newmont Goldcorp (NEM) runs the operation and assumes all the associated risk. Royal Gold simply sits back and collects a 2% royalty on all of the gold, silver, lead, and zinc that comes out of the ground.
This is a great business model... And it lets Royal Gold profit no matter what the price of gold is.
As the chart shows, Royal Gold's shares have returned more than 40% over the past 12 months. The stock trounced the returns for both gold and the S&P 500 over the same period.
Even if you've missed these gains, all is not lost. The Fed's continued rate cuts will boost demand for gold into the future... And with no end to the trade war in sight, global uncertainty will drive gold demand even higher.
Royal Gold is perfectly positioned to profit because of its superior business model.
Royalty companies enjoy all the upside of a bull market in gold without the usual costs associated with exploring for gold or building and operating an actual mine. It's a far superior business model to exploration and production.
Sometimes investing is simple.