If the Recent Sell-Off Spurred You to Buy Gold, You Have to Read This / Commodities / Gold & Silver 2019
BY ROBERTROSS : Gold has done well during the latest sell-off in themarkets.
But it’s not surprising. Gold has always been seen as asafe haven. When the markets tumble, investors flock into this asset.
In the global financial crisis, the S&P 500 plunged55.6% between October 2007 and March 2009:
Meanwhile, gold soared 25.4%.
The same happened when the dot-com bubble burst in August2000 and bottomed in May 2003.
Over this period, the S&P 500 lost 46.6% while goldgained 43.4%.
Clearly, gold is a great hedge against crises—and eveninterest rate hikes. But there are little-known stocks in the gold marketthat often do even better. The best part is they carry less risk.
They’re gold royalty companies. And they should be in yourportfolio.
Here’s How the Royalty Business Model Works
To build and operate a gold mine is very expensive. A minermight have a promising deposit but lack the money needed to get the gold out ofthe ground. That’s where a royalty company comes in.
The royalty company makes an upfront payment to a miningcompany and becomes a silent partner. In return, a royalty on the miner’sfuture gold production is negotiated.
A royalty gives the company the right to receive a fixedpercentage of a gold miner’s production. These payments typically continue foras long as the mine is active.
And that’s good for a number of reasons.
All of the Upside, None of the Downside
The royalty business model is best in that it gives unlimitedupside.
Gold miners are companies that dig upand sell gold. A gold royalty company doesn’t do any ofthat. Instead, it provides cash to miners to help them run their business.
When the miner sells its mined gold, a gold royalty companygets a royalty—kind of like an interest payment—for the upfrontinvestment.
The best part is that when gold prices rise, the royaltypayments rise as well. And so do the profits of the royalty company.
If the mine grows its gold production, the royalty companybenefits without investing any additional money.
But there’s another reason to love royalty companies: limiteddownside.
The royalty company is not on the hook for any additionalcosts. It doesn’t bear any variable costs and risks that come with running amine.
For a gold investor, this is a major benefitover owning a gold miner. See, gold mining is one of the world’s worstbusinesses.
It is a dangerous operation fraught with hazards that aminer can’t predict or control. Environmental activism, political risks,unions, and safety regulations are just part of that list.
Royalty companies get the best of both worlds. And luckilyfor investors, they’ve performed great during the recent stock market sell-off.
Royalty Companies Earn Three Times More Than Gold
Of course, gold has performed admirably during the recentsell-off.
But it’s been no match for gold royalty companies.
Take a look at this chart:
Since October 1, gold is up a modest 3.8%.
However, the average return for my top two royaltycompanies was 13.3%. That’s more than three times the returnfrom gold, and with less risk.
My Gold Royalty Picks
I should note that I’m not a gold bug.
My goal is to find safe, secure investments for my readers.Given its track record and current value, gold— especially gold royaltycompanies—offers a compelling value proposition.
One of my favorite gold royalty companies is Franco-NevadaCorp. (FNV)
Franco-Nevada is the largest gold royalty company. TheCanadian-based firm was also the first royalty company, so it knows a thing ortwo about the business.
The company pays a solid 1.3% dividend yield. And while thestock market was selling off the last two months, shares of Franco-Nevadaclimbed 13.3%.
That’s more than triple the return ongold over the same period.
While I like Franco-Nevada Corp., my favorite royaltycompany is Sandstorm Gold (SAND).
Sandstorm Gold is another Canadian royalty company with aportfolio of 185 royalties. This shields the company from any negative falloutshould a single royalty go bust.
The company’s diverse investments, solid balance sheet, andbusiness structure are why Sandstorm Gold is my favorite royalty streamingcompany.
And it shows in its share price. While the market has beena roller coaster since October 1, Sandstorm Gold was actually up 14.1%.
Bottom line: all investors should have some exposure togold in this volatile market. So, if you plan on putting your money in goldstocks, it should be a gold streaming company.
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