By E.B. Tucker, editor, Strategic Trader
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When this crisis first started in March, I had people calling me asking, “Why is gold crashing?”
I told them, “Maybe we’re looking at different charts. But it looks like gold’s doing great to me. It’s doing exactly what you want it to do. It’s preserving wealth during a difficult time.”
What those people don’t understand is that you’re not trying to get really rich in a bear market. You’re trying to lose less money than the other people involved in the market.
It wasn’t a straight shot. But gold did that in the first quarter of this year.
So, owning physical gold is a great first step to protecting your wealth. I’ll explain why. And after that, I’ll tell you about a little-known sector of stocks that I believe is poised to benefit in the coming years…
This Gold Bull Market Is Just Getting Started
Regular readers know I’m very confident about gold. I co-managed an investment fund focused on precious metals stocks. Today, I sit on the board of a fast-growing gold royalty company. I’m close to the gold business.
In December 2018, I predicted that in 2019, gold would rise 22% to hit $1,500 an ounce. My naysayers were all proven wrong when it hit that mark last August.
And I’m still convinced we’re in the early innings of this gold bull market. I expect gold to break its all-time high of $1,900 in 2020.
And right now, we’re in exactly the type of situation that panics people and sends them into gold.
There’s only about $10 trillion of gold in the world. The U.S. government just created $2 trillion through new government spending. Meaning it just, with the stroke of a pen, created about 20% of the value of all the gold in the world.
And there’s talk of Congress authorizing another $2 trillion. That would bring spending up to about 40% of the value of all the gold in the world.
On the one hand, the supply of dollars is infinite. On the other, the supply of gold is fixed at a slow growth rate. It’s a lot easier to push keys on a keyboard at the Federal Reserve than it is to find and extract precious gold.
That means gold will protect your buying power as all these newly created dollars hit the economy.
So gold still has plenty of room to run. If you’re new to buying physical gold, I recommend looking at 1-ounce coins. Hold it in your hand, and understand what it feels like, where it comes from, and why it’s the one asset in the world that’s not someone else’s liability.
Besides owning physical gold, one way to profit from this gold bull market is by owning gold miners. But you have to be careful with those right now…
The Impact of the Pandemic
The best feature of gold miners is how they perform when gold surges higher in price. A small move higher in gold has the potential to turn a mining firm from a money-loser into a money-maker almost overnight.
And mining companies usually surge as gold takes off. That’s because the price of gold tends to rise faster than the miners’ operating expenses. So cash flows in faster than they can find new ways to spend it. That tends to surprise the market.
The record-low oil price now also makes gold-mining operations more profitable. Energy typically makes up about one-quarter of miners’ operating costs.
However, a lot of mining companies are effectively shut down due to the coronavirus pandemic. Some are still open, but most were shut down. The refineries were shut down, too. Things are opening up to some degree now, but supply went offline just as demand for the safety of gold picked up.
The mine closures are a problem. Once you close a mine, it’s not like you can just flip a switch and turn it back on. So, while the restart is underway, getting back up to full production is not an overnight process.
Instead, there’s another way to gain exposure to gold with less risk, and that’s with the little-known gold royalty companies…
The Power of Royalty Companies
Royalty companies are different from miners.
Royalty companies control hundreds of thousands… even millions… of ounces of gold in the ground through legal contracts. They have a claim on a small percentage, usually 1% or 2%, of that miner’s production – regardless of how hard or costly it is to dig the ore out of the ground.
Even if the mining company’s margins are razor-thin, or if it has to lobby some foreign government to keep ownership of its mine, it still owes the royalty payment on any production. The royalty comes right off the top, in good times and bad.
The royalty has a few very important features:
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A royalty survives even when a gold mining company fails. Say Company A owes the royalty holder 1% of all the gold produced at its mine. It goes belly-up. Company B buys the mine out of bankruptcy. In this case, Company B still owes the royalty holder 1% of everything that comes out of the ground.
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A royalty covers future discoveries of gold on a property. Most mines go on producing far longer than planned. Once the operator is 2,000 meters and $1 billion into a project, it’s reluctant to leave. Usually, it spends money drilling looking for more gold at the bottom of the mine. The operator often finds it. The royalty holder gets 1% of that, too.
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A royalty owner doesn’t care if a mining company endlessly issues stock diluting its shareholders. This happens all the time in the mining business. Operators never seem to make money and never run their companies properly over the long term. But the royalty cannot be diluted. 1% is always 1% from now until the end of time.
Here’s the real power of a royalty company’s claim: If the price of gold surges, the royalty owner captures all the upside. Say the mining company produces 100,000 ounces of gold in a year. It gives the royalty company 1,000 ounces (1%), which the royalty company sells right away. If gold goes up $100 that year, the 1,000 ounces yields $100,000 more than it did last year.
Meanwhile, the royalty holder’s cost didn’t change. The day it bought the royalty was the last dollar it paid the mining company, even if that was 20 years ago.
As you can see, the royalty business has many advantages compared to actually mining gold. It’s the safest way I know to own exposure to physical gold.
You can get started today by looking into shares of Franco-Nevada (FNV). It’s the largest company in the sector and one of the safest ways to take advantage of the coming boom.
Regards,
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E.B. Tucker
Editor, Strategic Trader
P.S. In this market, you might be wary of buying stocks right now, even if it’s a gold royalty company. And that’s understandable. But there’s another way to gain exposure to this gold market WITHOUT owning stocks…
They’re called “Gold Placements.” And I’ve seen them deliver gains you rarely see with stocks… I’m talking returns like 5,509% and 6,200%.
They have nothing to do with bonds, ETFs, options, futures, or cryptos… but they can be bought easily through any broker.
I explain it all in this special online presentation. Go here to watch it now.