It doesn’t look like the economy is going to be stable any time soon. Unrest in Europe, looming U.S. deficit questions and poor unemployment are just some of the factors keeping the markets in a state of flux.
As we’ve told you before, watching CNBC and other mass media platforms has its disadvantages. Although the economy isn’t technically in the dumps right now, the news underscores the possibility that these events may lead to enhanced fear in the market.
And this fear is pushing gold and other precious metals to record highs. Gold is getting expensive and many analysts are even calling for gold to reach $1,750 before year’s end.
Since gold is so expensive, there’s a more significant downside to buying now and seeing prices potentially fall…
Less expensive gold ETF than GLD
For this reason many investors turn to ETFs such as the SPDR Gold Trust (NYSE: GLD, Stock Forum) to capitalize on gold’s upward movement while taking less risk.
Royal Gold, Inc. (NASDAQ: RGLD, Stock Forum) is an even less expensive play on gold. While the chart below shows that its stock is slightly more volatile than the gold ETF, it’s also about $100 cheaper per share. As the chart also shows, Royal Gold correlates pretty well with the gold ETF.
It’s crucial to keep in mind that the increased volatility and lower cost will magnify losses as much as gains. But considering so many factors are pushing gold right now, the risk that it will fall sharply is spread across multiple fronts.
- Debt panic in Europe is far from over, keeping the risk of euro devaluation high.
- Deficit panic, unemployment and inflation worries will keep the dollar at low value.
These low currency values will continue to push more money into safer instruments, namely precious metals.
Taking royalties on gold
Royal Gold is a company that invests mostly in gold mines, but is also interested in silver and copper mines. It invests in the mines rather than operating them, essentially collecting royalties on the mines it owns. This keeps operating costs at a minimum and plays on the margin that selling the metal generates. That’s why its stock correlates so well with the price of the metal. It also pays an average of 40 cents in dividends each year to add to the capital gains (or losses).
An interesting observation from the income statement is that Royal Gold improved its royalty revenue by more than 80% from 2009 to 2010. However, Royal Gold’s general, administrative and operating costs ballooned to almost 75% more in 2010.
Adding to this jump in operating costs is about $200 million in new long-term debt. It’s almost impressive that the company continued to be profitable after taking on these extra costs. It also shows that the company is expanding.
Which means that as gold increases in value, the stock will increase in value; but also that the company is making massive investments into its future. If these investments pan out, it may be less dependent on the price of gold going forward. If the investments fail to generate revenue, it could mean not even $2000 gold can help Royal Gold.
Either way, at around $60 per share, Royal Gold’s stock doesn’t require as much money to capitalize on percentage gains that are likely ahead for gold. That makes it more attractive to the average investor who may not be able to afford tangible gold or many shares of the ETFs.