Stocks/International

Lyn Alden Schwartzer

Filtering Through the Noise to Find Value

Gold Royalty Stocks Update (Yep, Still Buying)

I added a combination of gold, silver, gold miners, and gold royalty companies to my model portfolio in my November 2018 newsletter issue (with an overweight emphasis on the royalties), and have been buying ever since, through dips and peaks.

Back in June here on FATRADER, I wrote an article focused on gold royalty stocks and why I planned to keep dollar-cost averaging into them:

https://www.fatrader.com/p/analysis/Gold-Royalty-Companies-Have-Been-on-Fire-Lately-201906188952.html

When I first went long these precious metal stocks last year, the Fed was still raising rates. However, with high valuations in the broad stock market and evidence of a slowdown occurring, I became bullish on gold and the prospect for lower real interest rates (but without conviction on nominal bond yields).

The reason I like gold royalty companies is that they have lower risk of permanent long-term capital loss compared to miners, but still tend to capture a lot of the upside in gold with operational leverage. This makes it so that a relatively small position can have a significant positive impact on a portfolio.

For example, since November 2018, 5 out of the 5 major royalty stocks have outperformed the S&P 500, and 4 of them have outperformed TLT. Some of their gains have been truly explosive:

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And since June, 4 out of 5 have outperformed the S&P 500, and 3 out of 5 have outperformed TLT:

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We’ve had a bit of a pullback in precious metal investments over the past month, which I consider healthy. I always prefer it when I seem to be relatively alone in an investment rather than in a crowded trade, and like it when pullbacks can shake out some weak hands. We had a big pullback earlier this year in the springtime as well, and I enjoyed the opportunity to load up on some cheaper versions of the same stocks before they climbed higher.

In recent weeks, Osisko Gold Royalties (OR) really fell out of bed. Until recently that one was soaring high among its peers, but came plummeting down. This shows why diversification is so important.  

Lately, whenever a gold miner announces an acquisition, its stock gets crushed for a while. Osisko announced an acquisition for the remaining portion of Barkerville Gold Mines, which is a company that Osisko already one-third of. It’s a relatively large acquisition for Osisko, but the valuation of the acquisition was not excessive, so I think the market reaction here was overdone.

Osisko is not my favorite of the five in terms of management (that one would go to Sandstorm for my aggressive pick and Franco Nevada for the blue chip in the space), but it quickly became the most interesting in my view after this sell-off.

No individual gold royalty company represents a large portion of my portfolio, but together they are a pretty sizable chunk, and I remain bullish on the group with a multi-year view. We’ll surely have some rough pullbacks along the way.

As long as this cycle continues to unfold with Fed rate cuts and a slowing economy, I plan to be long gold and gold-related investments.

Looking beyond that, you can read my U.S. liquidity and weak dollar article to see my view on U.S. debt monetization and liquidity injections for the foreseeable future. I likely will remain long gold stocks to some degree at least until gold reaches new highs in U.S. dollar terms, but I’ll update if anything changes for that plan. Precisely what allocation I give them will depend on the attractiveness of other investments as opportunities come.

Lyn Alden Schwartzer covers North American stocks and international equity ETFs with a focus on fundamental valuation. Her background is a blend of engineering and finance, and she uses a dispassionate long-term quantitative and qualitative approach to filter through the noise and find value in stocks and markets around the world.
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