The market is near all-time highs. Global debt levels are near all-time highs. Interest rates are near all-time lows. These are very good reasons why investors might want to diversify into investments that have historically been viewed as safe havens, like precious metals.
There are different ways to do this, including buying a miner like Barrick Gold (NYSE:GOLD) or taking a bit of a different path and buying a streaming and royalty company like Royal Gold (NASDAQ:RGLD). Here’s a rundown on why one is probably a better option than the other.
Start by choosing growth
Barrick and Royal Gold share one thing in common that owning physical gold or an exchange-traded fund that invests in bullion doesn’t offer — growth. Simply put, the only upside potential for gold coins or bars is an increase in the price of gold.
However, miners and streaming companies can invest in their businesses and expand. That’s a key edge that makes them better long-term options for most investors looking for diversification via a gold or precious-metals investment. It’s not a guarantee of success, of course, since there are risks that go along with capital-investment activity, but over time, the upside potential is probably worth the risk.
The interesting thing is that capital-investment risk is part of the symbiotic relationship between miners like Barrick and streamers like Royal Gold. Streaming, to simplify things, is when a company provides cash upfront to a miner for the right to buy gold (or other metals) at a future date and a reduced rate.
For example, in a recent streaming deal, Royal Gold paid ERO Gold Corporation $100 million, with the potential for an additional $10 million, in exchange for the right to buy 25% of the gold from the NX Gold Mine in Brazil at 20% of the spot price. After certain production targets are hit, that rate rises to 40% of the spot price. ERO Gold, meanwhile, will use the cash to invest in the continued development of the mine.
ERO Gold wins because it gets access to growth capital without having to tap the capital markets, which would increase debt levels or, if stock was issued, dilute current shareholders. Royal Gold wins because it gets to lock in low prices for gold. And both win because their businesses expand.
However, for most investors, streamers will likely end up being the better way to add gold exposure to a portfolio. A look at Barrick and Royal Gold will help explain why.
Streamers have precious advantages
Barrick is one of the largest gold miners on the planet, with stakes in or complete ownership of 14 gold mines and three copper mines. Royal Gold has streaming and royalty deals with 41 producing properties. That gives Royal Gold a material edge on the diversification front, since it has more eggs spread across more baskets than Barrick.