We haven't talked about gold lately for one simple reason:
investor interest in the precious metal dissolved along with its
price. And with most gold mining stocks still beaten down, the
majority of investors seem content to remain on the
But gold looks to have bottomed in mid-summer at around $1,200
per ounce. That level marks a 37% decline from its 2011 high of
The bottom for gold is apparently now in place. Now the
question is how to play it.
My advice is to steer clear of the mining ETFs. They carry
exposure to too many companies still suffering from overextension
during the boom. Just look at Barrick (
), a holding of The Market Vectors Gold Miners ETF (
), as a prime example of what you don't want exposure
Barrick is one of the biggest companies in the industry with a
market cap of $18 billion. It just announced a $3 billion equity
raise to "strengthen its balance sheet and improve its long-term
liquidity." That news, announced last Friday, drove shares down
another 7.5%. The stock is off 60% over the past two years.
I don't want to own a basket of stocks that could include many
"Barricks." I'd rather own a targeted investment that represents
the single best way to gain exposure to gold's stabilization and
A far better option is a gold streaming and royalty company
such as Franco-Nevada Gold (
). This business model is a winner, especially in this
environment, since Franco-Nevada avoids various risks associated
with developing and operating gold mines. Yet investors still get
exposure to the upside of commodity price, reserve and production
In exchange for an initial investment, which helps a miner
fund exploration or mine development, Franco-Nevada receives the
rights to a portion of future gold production. This royalty is
usually around 2% of the extracted gold.
Royalty companies like Franco-Nevada are not subject to cash
calls to fund exploration, development or mine closures. And they
do provide operational or mine development management, so a large
and diversified portfolio can be assembled without the need for
significant corporate overhead. For example, Franco-Nevada owns a
royalty interest in more than 300 different projects.
The hard work is deciding which projects to buy into,
negotiating the terms and figuring out how much to pay.
Franco-Nevada has a proven history of doing this well, and I
believe the current environment offers up several new
Hundreds of junior gold miners are sitting on too few dollars
to stay in business. With their share prices obliterated, they
can't even tap the equity markets to raise cash. Franco-Nevada
can sweep in and buy up assets at fire-sale prices.
Its latest royalty purchase was a 2.5% royalty on Kirkland
Lake Gold's (KGI.TO) properties in exchange for $50 million.
Kirkland Gold owns some of the best gold properties in Ontario,
but the company's share price has been slashed by 80% over the
past two years. With little cash and a depressed equity value,
one of Kirkland's few options was to bring in a partner like
As a final point I should mention that over the past two
years, shares of Franco-Nevada are actually up, by 15%. That's
incredible performance in the face of an imploding industry. And
I believe it highlights the fact that the gold royalty and
streaming business offers investors exposure to gold's strength,
without the associated downside risk that an individual miner
I recommended Franco-Nevada to subscribers of my
Top Stock Insights
advisory service in July. We're up around 15% since then and I
still rate Franco-Nevada as a "buy." Given the low-risk business
model, I think Franco is a good way for gold investors to get
some exposure to the precious metal today.