Gold prices are down since January, and while many gold miners are enjoying elevated profits – there’s another part of the gold market I cover that people seem to be ignoring. It’s also seeing elevated profits, but the price just isn’t keeping pace.
If you’re the type of investor who wants a deal… pay close attention:
Whenever someone asks my favorite gold investments to buy and hold forever, here’s what I tell them.
It’s not gold miners. Once a gold mine goes into production, it becomes a wasting asset. Every ounce that comes out of the ground means the total net asset value of the firm is worth one ounce less.
It’s not developers. The risk reward for developers is better than miners. The market simply does not know how to value gold stocks in this sector – so as an individual analyst and investor, I have an edge. But even the best developers have a lifespan measured in years – not decades.
It’s not explorers. Explorers have the most upside of any gold stock. You can buy a company for a penny and see it rise to 25-50 cents – over years of drilling and diligent work to transform a patch of dirt into a viable deposit. But again: even if you buy an explorer on day 1, you’d better hope they’ve found gold and developed it into a deposit within 10 years. If they haven’t, the dirt isn’t worth the penny you paid for it.
More to the point: none of these types of gold stocks are long term holdings. You certainly wouldn’t want to hold a gold major through the ups and downs of multiple decades. ETFs that track an index of gold stocks like NYSE: GDX or GDXJ are even worse.
These ETFs aren’t actively managed. They just include a mix of gold stocks that hit certain parameters and market caps – which includes a ton of crappy companies you wouldn’t ever want to own.
So if my favorite long term gold investment isn’t miners, developers, explorers, gold majors or ETFs – what is it – and why is it underperforming right now?
I posted a news alert today about two such companies in my Golden Portfolio service. Both saw their revenues rise ~20% year over year, even as they saw gold production flat or down.
One of these companies boasted a 96% cash margin.
My Golden Portfolio service focuses entirely on this “other” type of gold stock.
I’m talking about royalty firms.
If you’re the type of investor looking for a long-term value, gold royalties are where you want to focus.
Due to their capital efficiency, long term deals (they typically get life of mine royalties), and diversification, royalty firms end up being the perfect complement to the junior gold stocks I cover in my other services.
Where gold juniors are volatile, cash intensive and high flying, gold royalties are the total opposite. They’re not flashy. They’re more tortoise than hare.
And even during the most incredible surges in the price of gold, this sector doesn’t get much attention from the investment public.
Over the long term, these royalty firms aren’t just the best gold stocks to own… I’d argue they’re the best stocks to own, period.
I rarely talk about this sector, even though it’s easily my favorite long term holding, and even though I believe royalties should be a part of any portfolio. The simple truth is, they’re boring in the best way – but they’re still boring.
If you’re at or near retirement, boring is good. Slow and steady is good. Not every gold security you own needs to be a double in the next 6 months.
But no company I know of (in any sector) has the kind of long-term performance of gold royalties. Consider Franco-Nevada, which has returned more 1400% since 2009 – quadrupling the performance of gold over the same time:
People tend to want to buy a company that has immediate upside leverage to the price of gold. Few miners do. When gold prices rise, so do diesel, labor, taxes and regulatory cost.
Margins compress more or less in line with inflation.
But royalty firms have no diesel costs. They have basically no employees. They have sky high margins, no matter what’s going on with inflation.
So if you’re the kind of investor looking for a simple, “gold price goes up” investment, royalties are it.
Check out my latest Golden Portfolio offers here.
Best,
Garrett Goggin, CFA, CMT
Lead Analyst and Founder, Golden Portfolio
