Why Gold Exploration Beats the Royalty Companies in a Gold Bull Market
Disclaimer: Your capital is at risk. This is not investment advice.
The smart crowd will tell you that the gold miners are risky businesses and that the royalty companies, which are lenders with the first claim on gold production, are much better businesses. That is true because having the first claim on production is a position of privilege that gets fed first, while the miner carries on producing until it’s their turn.
But what happens when the price of gold rises?
The high-quality, low-risk royalty companies, such as Franco Nevada (FNV), start to lag the market as we can see here. And worst still, they start to lag the gold mining sector (black) significantly.
The Best Stocks Can Lose in Bull Markets
That’s because the gold price is high enough to float all boats, and the gold miners are seeing their profitability increase, and so they outperform the royalty companies, whose margins are stable. As the gold price keeps on rising further, margins rise across the board, until one day, the miners are so profitable they simply match the performance of the gold price. Under those circumstances, to keep on growing profits, they must boost production.
If you extrapolate that, you get to a point where the exploration companies become the most desirable assets because they have negative margins that can only improve and the potential for vast production growth. That makes gold exploration stocks the most desirable business model during established gold bull markets, as these companies are the only ones capable of delivering positive surprises at high gold prices.
I was told that in the late 1970s, at the peak of the greatest gold bull market of all time, the gold miners traded at a premium to the value of their reserves. With the gold price above $2,500, it’s time to embrace gold exploration.
A Week at ByteTree
That was the foreword in this week’s Venture where I recommended my fifth gold stock. The two from last autumn are up 56% and 90%, the one from March + 63%, and the one from July -5%. With the price making an all-time high following a long period of consolidation, the gold miners are in fertile territory. This latest recommendation is a pure exploration company purely focused on growing reserves. If this bull market carries on like I think it will, there’s plenty more to come. What’s driving gold? Debt and deficits, which is the most underpinned growth story on the planet.
In The Multi-Asset Investor, where we own the gold mining ETF and silver, I highlighted how while gold was doing well, the rest of commodities have slumped and offer incredible value in comparison. As Charlie Munger always said, “invert, always invert”, which means always think about the other side and what would happen if things changed.
Gold versus Oil
In the 100th issue of ATOMIC on Bitcoin, I looked at Doublings and Halvings. They always talk about the latter, but price doublings are the thing that really matters! Bitcoin has doubled in price 20 times since 2010. Try that on your calculator…. It’s a big number.
In crypto, we highlighted that the ByteTree Crypto Average (BCA) indicator has been deteriorating since March. This means that the average crypto token is still under pressure and it’s time to take a defensive position until things improve. Still, a select few tokens are going against the grain and outperforming the wider market – Ali and Seran have those covered.
Have a great bank holiday weekend, and as usual, publications will be a day late due to the holiday.
Charlie Morris
Founder, ByteTree
