Well, the gold price seems to be recovering slightly this morning after a few days of backtracking once it got close to the $1,000 level again … so it’s time to look at another gold ad, no?
Today’s feature is an ad for the Big Gold service from Casey Research, edited by Jeff Clark (there are a few of those Jeff Clarks around — this is not the same guy who writes about options trading for Stansberry). The ad reinforces the oft-held position that everyone should hold some physical gold, but it also teases us about this special “48 Karat Gold” that most people don’t know about … here’s the first part of the pitch:
“While most investors sit by waiting for the next gold boom, a handful of American investors are quietly making it rich in a unique gold investment – collecting lump sums up to $7,217 every few months – regardless of spot gold price…
“If you’ve never heard of today’s best gold investment, you’re not alone.
“That’s because it’s a kind of gold you’ll never read about in the mainstream press. You won’t see advertisements for it on late-night TV.
“No commemorative coins or special-edition proof certificates. It’s never even minted.
“And while most investors will never make more than a 30% gain between major upward gains in gold prices – a very small group of investors are actually ignoring regular gold investments, like bullion, rare coins, and gold stocks.
“That’s right, even as spot gold prices hover around $1,000, these folks are throwing every red cent at a different kind of gold investment.
“I’m talking about a unique gold investment that’s made a handful of people extremely wealthy, independent of recessions, new taxes, and even dips in gold prices.”
Sounds good, right? The tease of a “secret way to play gold” is becoming an old chestnut by now, we’ve see variations from several publishers that claim they’ve got a better way to invest in gold — top secret, of course. Some of these have been collectible coins, or options strategies, or mining stocks. What are we dealing with today — more of the same, or something really new?
Here’s a bit more to tease you:
“Get Paid – Just for Owning It
“Let me show you how ’48 Karat Gold’ is way better than your typical gold investment.
“If you own stock in gold miners, then you wait and hope as the company sees if the land they own actually produces gold.
“Once they find the gold, then your company has to dig it out. They have to grade it. They have to transport it. Then they have to ship it to refiners – who take their own piece of the pie.
“Of course, you can make great money if a gold miner hits it big – and any serious gold investor should have some in their portfolio…
“But if you own ’48 Karat Gold,’ you don’t do any digging. You don’t grade anything. And you don’t pass any of the profits on to anyone else.
“You simply collect payments from your holdings – regularly, no matter what.
“How regularly? Every 90 days.”
OK, so we get it — this investment pays dividends, and it’s not a gold miner. Any more specifics for the Thinkolator to cogitate upon?
“In Denver, Colorado, in an 8-floor office building, a small firm on the first floor does nothing but take shipment of “48 Karat Gold.”
“They don’t own any mines.Are you getting our free Daily Update
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“They don’t own any digging equipment or smelting refineries either.
“They don’t spend a single dime on exploration, drilling, or mining licenses. They’ve never had to grease the palm of a local politician or sell a bill of goods to a landowner.
“The only thing they do is collect “48 Karat Gold” from mining companies – that’s it. That’s all they can do – they only have 14 employees!
“That’s all they’ve been doing for the past 9 years – and they’ve done it successfully every year since they started.
“In that time, they’ve passed on over $81 million directly to their shareholders in the form of dividends.”
So … pour that data into the Thinkolator, and it appears that this must be …
Royal Gold (RGLD)
The “48 Karat Gold” they’re referring to seems to be more broadly “mining royalties”, but the specific dividend paying investment should be Royal Gold, the leading gold royalty company.
Royal Gold is one of several firms that invest in mines in exchange for royalties once those mines go into production — the funding they provide allows mine development to go forward, and in return they get a (usually perpetual) royalty on anything produced from that mine — Royal Gold might get, for example, a net smelter return (NSR) royalty of 2% of the gold from a particular mine. They don’t have to invest any more (usually), they just sit back and collect the royalty. There are other firms in this business, and it’s a very attractive business model so it has been teased many times before, I’ve written about Royal Gold for some Matt Badiali teasers a while back, and also about similar (but not as gold-focused) royalty companies like International Royalty Corp and Franco-Nevada.
Royal Gold does indeed have a small staff — it has been reported as 14 in recent years, though I don’t know if that’s currently accurate, and they do have their offices in a unassuming-looking building in Denver, as teased.
I own shares of Royal Gold personally, and do have a wide stop loss order in on the shares but otherwise don’t have any plans to sell my holdings. I think it’s an interesting company, and it’s a decent way to get exposure to some of the large mines that are coming into their own over the next few years (including Penasquito and Dolores in Mexico, both of which RGLD participates in) without placing a big operational be on any particular miner. There is obviously huge commodity price risk in these shares — if gold drops to $500 an ounce many of these royalties will turn out to have been dud investments, and we should expect RGLD shares to collapse, but I expect that in a rising or stable gold price environment RGLD’s efficient operation and experienced management should be able to continue to make good royalty investments and pull in growing cash flows.
As to the dividend? It did start nine years ago, in 2000 … and it has gone up. That’s the good news, but it’s still extremely small. It might grow nicely if they decide to stop reinvesting much of their cash flow into new royalties, but I have no idea whether that’s likely to be their policy or not in the future. If you want to get the teased huge returns from the dividends, you’ll either have to invest a boatload up front, buy a time machine and go back to buy shares many years before the dividend began, or wait for a decade or two and hope the dividends continue to grow. The payout is currently at less than a 1% yield (32 cents per year, payable quarterly).
If you wanted that big $7,217 payout each quarter starting now, you’d need to invest close to $4 million in the shares if I’ve done my math right. That may be feasible for some of you, I suppose, but it’s definitely out of my league … though of course, if you bought shares back in 1991 or 1992 when they were well under a dime, you could have bought so many that, if you had held through the lean years, an 8-cent current quarterly dividend would seem stupendous. This seems unlikely to be an income play in the near future, though it may, like many modest dividend payers, become one for those with the patience to hold and compound their returns for decades.
This payout level appears to be the standard for profitable royalty owners, for whatever that’s worth — both Franco-Nevada and International Royalty also currently pay out very modest dividends in the neighborhood of 1% annually.
So — is Royal Gold for you? It’s an interesting middle ground — sort of like a gold mutual fund, you get exposure to a number of mining properties with diversification that limits your downside, but you also get much less chance of a stratospheric upside from a big unexpected discovery. RGLD also has some legacy royalties that are not on precious metals, from the days before they became gold-focused. You can review their portfolio here, the current royalties that are driving their returns are mostly in Nevada and Mexico, but they have a number of other projects around the world. They also announced some improvements to their reserves and production forecasts late last month if you’d like more detail.
Oh, and I mentioned that others have teased Royal Gold in the past, too — it’s currently featured as a teaser in one of the ads for Matt Badiali’s S&A Oil Report, Royal Gold isn’t the main company teased (I think those are prospect generators again, though I haven’t checked yet), but an add-on at the end teases us about a great investment that he called “Dempsey’s 1,000% Royalty Secret” … that’s Royal Gold, too, named for former CEO and current Chairman Stanley Dempsey.
Like pretty much all the royalty companies, who have much higher margins than most miners, Royal Gold looks very expensive if you look just at traditional metrics that are usually applied to operating companies — the PE ratio is in the 50s, they have a very small net cash position, and they trade at about three times book value. Buying RGLD is all about the future revenue streams that have already been paid for — what you think of Royal Gold should be based on what you think those revenue streams will be in the years ahead, which is going to be largely based on the price of gold, and on your confidence in the management’s ability to keep building the royalty portfolio. Feel free to share your opinions below about Royal Gold, or about any of the other royalty companies or similar investments — those might include Silver Wheaton, Franco-Nevada, International Royalty, the oil and gas royalty trusts, the little prospect generators that explore properties and then sell them in exchange for royalty interests, or, really whatever you feel like talking about.
So far there is only one available subscriber review of Big Gold, but we’d be very happy to have more if you’ve ever subscribed. And of course, you can see how Big Gold stacks up against other commodity-focused newsletters here.
Full disclosure: As noted above, I do currently own shares of Royal Gold and have a stop loss order in place for those shares at a much lower price — other than the unlikely exercise of that stop loss, I will not trade in any company mentioned above or at least three days.