The opening to Eric Fry’s latest teaser ad sounds similar to many other gold-focused teaser pieces we’ve looked at over the years…
“If you want to make a fortune in 2020, there is only one thing to know. After four years of going nowhere, gold is once again in a bull market.
“Because of events stemming from the recent ‘coronavirus panic’ (which I’ll detail in a minute), this new bull market will be unlike any other we’ve ever seen before…
“Frank Holmes, CEO of U.S. Global Investors, says the price of gold is going to hit $10,000 per ounce.
“Pierre Lassonde, chairman of Franco-Nevada Corp., has even higher expectations. He believes gold could easily hit $25,000 over the next 30 years.”
Those two dudes made fortunes on gold, and the fortunes they’re making today rely on them selling the gold story, so it’s no surprise that they’re super-bullish… they almost always are (Holmes manages mutual funds that are best-known for their gold focus, Lassonde founded and operates the largest gold royalty company).
So what’s Fry selling now? Well, he’s mostly selling his newsletter, of course, Fry’s Investment Report ($79/yr), but he’s using the notion of “the #1 Gold Investment in America” to get you to pull out your credit card. So let’s research that a bit, help you build your own opinion, then once you’re comfortable with the reality behind the tease you can make the call on whether you want to subscribe to another newsletter, without the pressure of “secret” behind the curtain.
Here’s a bit more from the tease:
“I’ll show you, step by step, the #1 gold investment you can make to capitalize on the new bull market in the yellow metal.
“And no, it has nothing to do with bullion, coins, ETFs, mining stocks, or any other type of investment you’ve likely heard about before.
“What I’m about to show you is MUCH better.
“The #1 Gold Investment in America
“In the last gold bull market from 2000 to 2011, this investment went up…
“Roughly five times more than bullion…”
He shows that in a handy graph, too, which always gets attention — during that bull market, the gold price rose 281% and this “#1 Investment” apparently rose 1,622%. Not bad, eh? Particularly since some actual mining stocks, like Barrick (GOLD) actually were worse investments during that time than just owning the metal itself (that happens with some regularity, unfortunately — miners tend to overspend in good times, and it’s a pretty terrible industry with high fixed costs, high uncertainty and risk in each operation, and no control over the price of the end product).
Fry throws in a good dose of fear as well, as is pretty much required of any gold pitch…
“I believe the world’s richest people know that an historic transfer of wealth is about to happen very soon.
“A huge financial ‘reset’ is coming.
“And the world’s richest people stand to get even richer as a result of it.
“Here’s what they know that you might not know…
“A paper currency like the U.S. dollar not only acts as money…but it’s also like the ‘stock price’ of a nation.
“If a nation’s government manages its tax revenue and spending smartly, that nation’s currency will rise in value—or at least remain relatively stable—over the long term.Are you getting our free Daily Update
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“On the other hand, if a nation’s government manages its finances like a drug addict, chances are good that its currency will fall in value.
“For example, from 2000 to 2010, the African nation of Zimbabwe managed its economy horribly. It printed way too much money.
“During that time, Zimbabwe’s currency dollar fell in value by over 99%.
“The savings of its citizens were wiped out….
“And then there was America’s neighbor to the south, the nation of Venezuela, from 2010 to today.
“Over the past decade, its political leaders have run the economy into the ground. The currency has plummeted in value.
“The savings of its citizens were also wiped out.
“These are small countries, but the currencies of large, rich economies can also experience big moves…”
The purchasing power of the dollar, like all currencies, has tended to fall over time — usually gradually, but sometimes suddenly, like during the inflation spikes 40 years ago. That is indeed one of the main reasons to own gold as a savings buffer — it tends to offer diversification against the dollar (or other global currencies), and it tends to hold its “purchasing power” over long periods of time. That does not mean it’s guaranteed to hold up during a particular year or even a particular decade, of course, gold fell in price from $1,800 to under $1,000, a 40% drop, over just a few years in the last decade — the stability that gold tends to provide is measured in centuries, not years, so we get plenty of volatility as sentiment rises and falls for the shiny metal. These fiat currencies, untethered to anything of specific value, are an experiment that’s only 50 years old now, so to a large degree we’re just guessing what the next steps will be… but I agree it’s important to have some gold as a way to diversify and protect yourself from falling currency values.
And in the near term, most of the Milton Friedman economists will tell you that the fact that we’ve washed a few more trillion dollars into the system with the coronavirus rescue and the Federal Reserve easing means that inflation is inevitable… which could crush the value of the dollar, and therefore make the value of gold rise in dollar terms. I don’t know about “inevitable,” if we head into a long recession or a long recovery from this sharp recession, and people are reluctant to spend, then we might not see inflation for a long time…. but I’ll agree with “likely.” That’s why I’ve upped my exposure to gold a bit this year.
But anyway, you’re not here for my musings… it’s Eric Fry’s secret investment idea that you’re curious about, no?
He reiterates that it’s the global “rescue” money for COVID-19 that’s going to really prime the pump for gold…
“… we have never come close to the amount of credit that we’re about to see pumped into our economy.
“This will cause things to change drastically…
“The effects of which are going to cause the price of gold to go parabolic.
“I know this because almost every single time this has happened throughout history — when a country tries to “print” its way out of a crisis — it has ended the same way…
“With massive swings in the price of gold…”
And the examples he gives, like the Weimar Republic’s inflation that sent the gold price in Deutsche Marks up more than 10,000% (and led to the rise of Hitler), or the 829% rise in the gold price in Peso terms when Argentina’s inflation crisis took hold in the early 2000s. Will zero interest rates and negative interest rates and massive stimulus spending bring that to the big Western economies in the years to come? Maybe, though probably to a lesser degree… partly because the COVID-19 crisis is happening to everyone, all at once, around the world. We’re managing the public health crisis worse than most, for sure, but we also have the wherewithal, at least for now, with confidence in the dollar still strong enough to allow the Fed to print as many of them as we want, to spend freely on the rescue and the “rebuilding,” and the financial world is far more interconnected than it was even 20 years ago.
So again, I mostly agree that there’s meaningful potential for gold to soar in the next decade… but let’s not get ahead of ourselves and say it’s inevitable or guaranteed. Words like “inevitable” lead to disastrous portfolio decisions from folks who can’t accept their inability to predict the future.
And Fry does say some sensible things along those lines in his ad, to be fair… here’s that little section…
“Hope for the best, but plan for the worst….
“Yes, the dollar has lost over 95% of its purchasing power since the introduction of the Federal Reserve, back in 1913…
“And yes, by printing trillions, that same Federal Reserve risks driving inflation to record highs and dropping real interest rates lower than ever before.
“All that being said, the dollar remains, for now at least, the world’s currency. And in all likelihood, it’ll remain the world’s reserve currency next month…and next year, too. Maybe even 10 years from now.
“But the dollar seems likely to continue gradually losing its value against gold and other hard assets.
“In fact, it is not unimaginable that the dollar could, one day, go to that great currency graveyard in the sky…
“And there it would meet its predecessor, the U.S. continental, which was inflated out of existence toward the end of the 18th century.
“Whether that day comes a year from now or 10 years from now, it pays to be prepared.
“The best, most simple way to do that right now is by owning gold.”
And now, finally, we get into the clues… what is the “secret” he recommends?
“I don’t recommend going out and buying regular old gold bars or bullion.
“Instead there’s one investment I know will do much, much better….
“Most people don’t know this, but there’s a way to own lucrative royalty rights on America’s richest gold mines…
“This is about as off the radar as you can get in the gold industry right now.
“The kind of investment I’m passionate about finding…
“Because the upside is undeniably huge.”
Ah, so we’re dealing with some kind of royalty investment in gold… that’s a small universe of stocks to play in, but it’s certainly not “off the radar” — gold investors have been delighted by (and sometimes obsessed with) royalty companies for decades now. Two of the top ten holdings of the biggest mining ETF (GDX) are royalty companies, Franco-Nevada (FNV) and Wheaton Precious Metals (WPM). You may or may not know much about them, but they’re not “off the radar.”
What else does Fry say about the one he favors at the moment?
“One reason these royalty investments clobber just about everything else in the gold universe is because of the way they’re structured…
“You see, with gold royalties there’s no exploring, developing, or any of the regular costs that come with building a gold mine.
“You’re simply buying rights to an existing mine’s gold production and collecting the royalties as these mines churn out the metal.”
And he gives a couple examples…
“One of these royalty investments, for instance, owns royalty stakes on the famed Cortez gold mine in Northeastern Nevada.
“Since its inception in 1986…
“It has made gains as high as 297,900%.”
That’s Royal Gold (RGLD), which as I do the math has total returns of more like 5,500% from the early 1980s to today… still excellent, but 297,900% is way off unless they found some way to buy at an all-time low price in the mid-80s (that was a failed exploration company that started to turn itself into a royalty company around 1986).
“Another royalty investment has stakes on one of the largest gold deposits in the world today, the Goldstrike mine, which has produced a total of more than 40 million ounces of gold.
“This company has handed investors incredible gains as high as 1,273% since it went public in 2007…”
That’s Franco-Nevada (FNV), which is seen as the founder of the royalty business… though Royal Gold might argue, since they started to build their portfolios at near the same time. FNV did come public most recently in 2007, but that’s only because they had been bought out by Newmont around 2000 and Newmont eventually decided to sell off most of its royalties, which the Franco-Nevada founders effectively bought and re-listed the company. So their lineage as a public company and royalty firm is a bit broken in the middle, but the recent stock market performance has been exceptional, with FNV typically getting the highest premium valuation of all the gold royalty companies, and the history really goes back to the mid-1980s as well.
And one more…
“A third royalty investment company has stakes on the San Dimas mine. It is among the oldest, most profitable gold deposits in Mexico, one with excellent upside potential for exploration.
“It has soared as much as 1,569% since starting out in 2004.”
That’s the second biggest precious metals royalty firm, Wheaton Precious Metals (WPM), which used to be called Silver Wheaton — they were founded with a somewhat different strategy, buying up the ancillary silver rights from miners who were focused on other metals, calling these “streams” — for relatively small amounts, they would buy the right to buy all the silver from your copper and gold mine, for example, at $1 an ounce (just an example), so it was a relatively low-impact way to get financing for mines that were primarily focused on more exciting metals (silver was quite beaten down at the time). That worked out quite well, though they’ve morphed more into gold streams and royalties as well over the years, and had a longstanding tax dispute with Canada that also depressed the shares for a few years.
Those are probably names you’ve heard if you’re at all interested in gold and mining, they’re multi-billion-dollar companies and they’re the three best-known gold royalty owners in the world. That’s not what Fry is teasing, however, those are just examples to whet your appetite for the huge potential returns — he’s got something a little more obscure in mind…
“I’ve found just the royalty investment to own as world governments print their currencies into oblivion and turn interest rates negative…and the price of gold skyrockets in the coming months.
“With a total of 43 streaming and royalty deals attached to gold mines in five different countries all over the globe…
“And many more on the way…
“This little company is like a hidden gold deposit just waiting to be tapped.
“Shares are currently trading for just $5.”
So with 43 deals and a $5 share price, that’s certainly not one of the biggies. Which one is he talking about? Thinkolator sez this is relative upstart Metalla Royalty & Streaming (MTA), which is now actually up to 49 deals in its portfolio (they were at 43 less than a year ago, after their big deal to buy 18 royalties from Alamos Gold (AGI) in the Spring of 2019.
The big deal for Metalla over the past year is that their steady acquisition of royalties led them to grow big enough that they could get a listing in the US in January, which got investors excited, and unlike most of the small players in this space they actually pay a dividend as well. It’s a trivial dividend, but that’s still meaningful for a lot of investors… and, indeed for some of the companies they partner with (since they’re small, they’ve made a lot of their royalty deals by mostly exchanging Metalla shares for royalties — and the little companies who get those shares might want a little cash flow). The dividend is more of a signal than it is a financial driver — they have come close to breaking even most quarters on a cash flow basis, but even the limited cash flow from operations has not yet quite covered their roughly $300,000 per quarter dividend commitment.
Metalla now, after about four years of building the portfolio, has four producing assets that generate their cash flow, and another four that they anticipate generating cash flow in the near term — mines that are being built or will soon be built. They’ve gotten quite a bit of attention, mostly because they’ve built their portfolio very quickly… but probably partly also because publicity-friendly Adrian Day Asset Management and Peter Schiff’s Euro Pacific Capital are both substantial shareholders, and E.B. Tucker, who writes newsletters for Casey Research, is on the Board of Directors — that’s a very promotional bunch, and when you’re building a mine company promotion tends to be part of your DNA.
You can get a pretty good overview of the company and where they see themselves from their latest Investor Presentation here, which came out when they made their latest acquisition of a 1% royalty on the Wharf mine operated by Coeur (CDE), which is a major shareholder of Metalla (though a shrinking one, Coeur sold a big chunk of its shares in a secondary two weeks ago at $5.30, so now owns about 4%, down from 15%).
If you want to get an idea of the economics of Metalla’s deals, you could go through their past filings… but we at least have this latest one to consider. Metalla and Coeur’s deal effectively ends up with Metalla paying $5.76 million for a 1% NSR (net smelter return) royalty on the Wharf mine, $4.76 million worth of MTA shares and $1 million in cash. They say that Wharf is expected to produce 80,000 ounces of gold (or more) annually for a seven-year mine life, based on the updated 2019 reserves.
A 1% NSR effectively means you get 1% of the production, at no further cost. Sometimes the NSR is a little lower than the actual reported production, but they’re effectively the same thing — the amount of gold that gets mined and smelted, and turned into bars. 1% of 80,000 ounces would be 800 ounces, so at today’s price of roughly $1,800 that would mean roughly $1.44 million of annual cash flow for those seven years (assuming that the production stays at this level, the mine continues to operate, and the gold price stays at $1,800 an ounce). That’s exactly a four-year payback period, meaning by the end of the fourth year the investment Metalla made to get the royalty would have been repaid, and everything after that is a return on the initial investment. Of course, if gold is at $2,300 in a couple years then the payback is dramatically faster… and if gold trades instead at $1,000 an ounce for the next seven years, Metalla would just barely earn back its money and make no profit (or worse, since if gold stays at those levels for a long time it’s quite possible the mine could be losing money, so they might shut down and wait for better prices).
And beyond that, the upside comes from the fact that the mine has another 400,000 ounces in measured and indicated resources, not yet proven up as reserves or in the mine plan… and once they get closer to the end of the mine’s life, they might decide to drill more and try to extend the mine if they believe the ore body is larger, so it’s possible that if the mine turns out to be very long-lived they might be basing the royalty acquisition price on the current economics, but have some hope that the seven year mine life could turn into 12 or 15 years or longer.
That’s what creates value in royalties, the two sources of leverage are commodity prices and mine extension — a royalty that’s sold in the secondary market is based on the curren