How I Invest in Gold and Silver: Royalty and Streamers

Royalty
04/08/2021

In yesterday’s Market Moment I highlighted why Gold is on the verge of starting a new uptrend. So far so good!

Our breakout trigger signal is on the cusp of playing out as the 10 year yield drops, the US Dollar weakens, and the Japanese Yen pops higher. All three were confluences we were looking for as outlined yesterday!

There is even a trade set up here on Silver, with a downtrend line and resistance being taken out. Climbing back above the all important $25 dollar zone.

I have always been asked how I invest in the precious metals. There are many options. Believe it or not, I am a big fan of physical bullion. There is nothing better than looking at shiny hard asset coins. I admit, I am a stacker.

But then there are the traditional finance ways: ETFs, Junior Miners, Mining Operators and Royalty and Streamers.

For today’s discussion I will not be talking about the junior miners. I play them, but to me, they are a speculation. I will post my criteria for juniors in the future. Yes, this is where you will make big gains, but the risk is high. Although, I still believe when Gold and Silver get their larger moves, the juniors will be popping just like the alt coins during the Bitcoin run up to 20k in the first crypto mania.

This Market Moment is about why I believe Royalty and Streamers are the best and safest way to play the precious metals.

What is a Royalty and Streamer you ask?

A regular mining company sticks drills into the ground, uses shovels, they try to find and extract the actual Gold and Silver. It is a very expensive business factoring in the labor costs, the machinery and the costs of doing business. Their balance sheets tend to show a lot of debt, and if the price of Gold and Silver drops, they cannot just stop mining.

The Top 6 Things We Believe Investors Should Know About Royalty Companies -  U.S. Global ETFs

A royalty and streamer on the other hand, issues loans to mining companies, thereby helping to finance the development of said mining companies deposit(s). In exchange for the funds/loans, the streamers receive a set amount of Gold and Silver physical metal in the future when the mining company successfully begins to extract from the ground.

Think of them being the value stocks in the space.

The key point here is that streamers generally have a fixed cost (in terms of how much they loan, and labor costs), while their revenue is variable ( the price of the metals they receive varies over time). Royalty and Streamers are leveraged to the price of metals, and their charts often reflect the expectations of precious metals into the future. So if you do not want to buy them, at least use them for sentiment and confluence for determining precious metal prices.

I mentioned the labor costs being minimized, but other risks are avoided too. For example, Royalty and Streamers do no need to worry about Governments increasing taxes on mining once the mine is developed and begins extraction.

There is an ever increasing list of Royalty and Streamers, but the big five would be Franco-Nevada, Wheaton Precious Metals, Royal Gold, Osisko, and Sandstorm Gold.

Wheaton Precious Metals Reversal…
Sandstorm Gold Reversal…

Being a technical guy, I couldn’t help but notice the reversal patterns on Wheaton Precious Metals and Sandstorm Gold. Both have triggered reversal patterns: A Head and Shoulders, and a Cup and Handle. Bodes well for the price of precious metals Royalty and Streamers reflect future price expectations.

Let’s break down the benefits of a Royalty and Streamer.

A Royalty and Streamer maximizes exploration upside, security of tenure, and focuses on new investments, while minimizing cost exposures, margin encroachment, and involvement in mining.

To break this down even further, let’s compare investing into either the GLD ETF, a Royalty Streamer, and a Mining Operator. In terms of limiting exposure and benefits, a Royalty and Streamer wins in all categories. The best of both worlds.

GLD ETF Royalty Streamer Mining Operator
Limited Exposure to:
Capital Costs YES YES NO
Operating + Other Costs YES YES NO
Benefit of:
Leveraged to Gold Price NO YES YES
Exploration + Expansion NO YES YES
Dividend Yield NO YES YES

What happens when Gold and Silver fall? Because Royalty and Streamers are leveraged to the price, they tend to fall as well. But here is the kicker. A mining operator will continue to mine even if margins begin to drop, and quite frankly, they start losing money. Hence why their balance sheets generally show a lot of debt.

A Royalty and Streamer will still be making money, will likely be paying out dividends, and can still hammer out catalysts for the stock price. If the management is great, they will use bear markets in precious metals to create and acquire new royalty deals which will pay off handsomely in the future.

In summary these companies are the safest way to play the precious metals in a bull or bear market, and I highly suggest you consider them for your portfolio.

 

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