Royalties edge Producers for Inflation from Oil
As oil continues to rise, soon miners production costs will also start rising. Royalty companies, with their set prices to purchase ounces, have an advantage over Producer Miners over this considerate cost factor. Gold Royalty companies are double insurance against inflation in this regard.
1. Gold Royalty companies like FNV are insurance against the austrian definition of inflation, which is monetary expansion
2. Gold Royalty companies are insured against 'cost-push' inflation from rising oil prices, because, unlike Gold Producers, Gold Royalty companies buy a significant portion of their gold at a set price, and are so inflation-indexed against the rising cost of producing gold.
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Gold equities have been in a sweet spot since 2008 whereby costs have been somewhat contained while commodity prices have improved. The time to make serious money in the equity markets is during phases when you have margin expansion, similar to the 2001 to 2004 period. However, during the 2004 to 2007 period, margin compression despite higher commodity prices was a bit of an issue, which was reflected in the lack of equity performance. We are starting to see signs that costs are creeping up again. Consequently, one is more inclined to lean toward producers that have the majority of their capital expenditures behind them, or alternatively, royalty companies that give you exposure to the commodity but not to potential cost inflation.