The 3 Best “Royalty” Gold Stocks To Buy Now

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To some extent, gold has simply been in a long consolidation after the extraordinary move early last year, when gold jumped over 30% from its end-March low to early August high.

The current gold bull market started at the end of 2015, when gold hit $1,051. Gold cycles, both up and down, tend to be long; indeed, the shortest have been the last two, in the 1970s and from 2001 to 2011. And it is not unusual for gold to have mid-cycle corrections, often caused by an extraneous shock.

In the 1970s, gold dropped over 40% in a correction lasting 20 months. In 2008’s credit crisis, it fell nearly 30% in eight months. So far, this pullback has taken 15% off gold’s peak price — a piker by historical standards — and has lasted just 13 months, well within norms for mid-cycle corrections. I would suggest that gold bottomed last March at $1,685, meaning the correction lasted less than seven months.

One major factor holding back gold is the Federal Reserve’s constant threat to start tapering. The Fed has a history of talking more than doing, and, for reasons beyond me, the institution still has credibility.

The fact is that many times in the past gold moved down in advance of Federal Reserve tightening, responding to growing talk, but turned when it actually started to tighten. This is “buy the rumor, sell the news”, only in reverse. Gold acts this way because all-too-often when the Fed does start to act, it is too little too late.

The Fed started raising rates in August 2005, and again in December 2015, after months of discussion. In both cases, gold bottomed the same month rates started being hiked. Similarly in May 2013, when the Fed started talking about tapering, gold slid for the next several months. It was just before Christmas that we saw the first rate hike, and gold bottomed almost to the day.

The recent action has been frustratingly modest and volatile. However, the longer gold meanders in its current trading range, the faster and stronger the eventual move will be. In the meantime, gold investors can accumulate at prices that will appear very good in a few years’ time. They should not wait too long.

The major mining stocks are now extraordinarily inexpensive, with the senior and intermediate gold companies trading in the lowest 25 percentile of their historical valuations, and more-or-less the lowest price-to-free cash flow ever. Given the price of gold, given the strong cash flows, given the improved balance sheets and given the improved discipline among top mining companies, today’s low valuations are a gift.

The major mining companies may be very undervalued, but there is no getting away from the fact that mining is a difficult business and the stocks tend to be very volatile. For the non-specialist, one of the safest ways to invest in the gold space is with the royalty and streaming companies. 

These companies, instead of actually mining themselves, invest in other companies and projects in return for a percentage of the revenue. They may invest in producing mines perhaps to fund an expansion, or in development projects or even in exploration. 

A royalty typically makes its entire investment upfront and receive a percentage off the top, while a streamer makes ongoing payments in addition to the upfront payments. The benefit of the model is that the royalty or streamer is not responsible for things that change, with the mine or the country. 

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