The Fourth Way to Invest in Gold

Eat your heart out, Hannah Montana. Gold as an investment vehicle has seen the kind of meteoric rise in fame normally associated with the stars of stage and screen. The notorious king of pop, Michael Jackson, knew a golden opportunity when he saw one: royalties. Jackson made a shrewd investment in royalties when he outbid Paul McCartney for a catalog of Beatles song royalties back in 1985.

When it comes to gold, Fools may have a similarly golden opportunity for long-term gains through royalties. Unlike high-profile miners like Newmont Mining (NYSE: NEM  ) , bullion proxies like the SPDR Gold Shares (NYSE: GLD  ) ETF, and physical bullion, gold mining royalties remain an obscure -- though potentially golden -- investment vehicle.

Royal Gold (Nasdaq: RGLD  ) is one such vehicle, and the company's addition last year of royalties from a number of mines operated by Barrick Gold (NYSE: ABX  ) has brought this stock some overdue attention. Royal Gold delivered earnings last week for the fiscal second quarter 2009, featuring free cash flow that represented fully 79% of revenue. For a challenging period during which gold sank to near $700 and base metal prices collapsed dramatically, Royal Gold remained profitable with $3 million in adjusted net earnings. The Barrick portfolio pitched in $4 million in revenue for the period.

As any one-hit wonder from the music business will attest, the true value of royalties is realized over the very long haul. With a business model that commits up-front capital to acquire long-term royalty interests, Royal Gold is more suited to the patient Fool than to the swing trader. That being said, this is potentially a real growth story in the making.

Of the company's 25 producing royalties, two of the most noteworthy mines are still ramping up to full commercial production: Goldcorp's (NYSE: GG  ) world-class Penasquito mine and Minefinders's (AMEX: MFN  ) promising Dolores property. An additional nine mines remain in the development stage, and the potential confluence of their transition into production while gold remains in this multi-year bull market is generating some excitement among investors. With a royal twist on the silver stream model employed by fellow Penasquito beneficiary Silver Wheaton (NYSE: SLW  ) , Royal Gold offers Fools one more way to participate in gold's historic run.

Royal Gold garners only two stars out of five from the venerable community of investors at Motley Fool CAPS. Come share your insights on this and other gold investments.

Further Foolishness:

Fool contributor Christopher Barker has maintained an outperform rating on Royal Gold since November 2007. He can be found blogging actively and acting Foolishly within the CAPS community under the username TMFSinchiruna. He owns shares of Minefinders, Royal Gold, and Silver Wheaton. The Motley Fool's disclosure policy continues to write the songs that make the whole world sing.


Read/Post Comments (5) | Recommend This Article (18)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On February 09, 2009, at 6:48 PM, jmnash1 wrote:

    Just a question: Are indicators like the P/E or the PEG ratios important in analyzing investments in gold royalty companies like RGLD? Because if they are, this recommendation looks shaky – according to data shown on Yahoo, RGLD's P/E is shown at 39.5 (forward), with a PEG at slightly over 11! – all of which makes the stock look insanely expensive, if those key ratios have any relevance.

  • Report this Comment On February 09, 2009, at 7:20 PM, XMFSinchiruna wrote:

    jmnash1,

    A fair and sensible question. After all, the stock promptly doubled between late November and the end of 2008... coming back somewhat more recently.

    I haven't seen specific royalty revenue guidance for 2009 or 2010, but will let you know if I come across those numbers. Without those numbers, I'm afraid I can not elaborate further on valuation for now. I will comment, however, that within the trough of the massive correction in gold and silver equities, which I believe October / November will prove to have been, the potential for valuation premiums to have remained within industry equities was thoroughly and systematically vanquished by the resoundingly negative sentiment that prevailed in the precious metals market. This is solely my personal opinion.

    Please be sure to perform due diligence, and I will report back if I find royalty revenue guidance numbers.

    Fool on!

  • Report this Comment On February 09, 2009, at 11:26 PM, moelitvak wrote:

    In the early 80s I worked at Warner Bros. Music as a music consultant & recording engineer. I was also (and still am), an avid Beatle fan. When it became clear that the catalog of Beatles song royalties was available for purchase from Lord Lew Grey, I suggested to WBM President Chuck Kay that he have Warner Communications buy that golden catalog since it would really be "a license to print money." He dismissed my suggestion saying that the $60 million price would also include have aditional $20 million that Lew Grey was asking in order to unload his chain of Odeon theaters in the UK.

    I believe Jackson subsequently paid more than $100 million for the Beatles music catalog.

  • Report this Comment On February 10, 2009, at 8:10 AM, XMFSinchiruna wrote:

    From a fellow Beatles fan, thanks for sharing your experience from inside the industry. The irony of that entire situation... that a musician like McCartney could be outbid for the royalties on his own music by a pop star (and former friend)... it was just a nutty event.

    The figure I saw was $47 million, but I believe the purchase ended up being a partnership with Sony, so perhaps $47m each for about $100m?

  • Report this Comment On May 24, 2009, at 6:00 PM, smartgold wrote:

    Totally Awesome Article!!! I think there is much more to investing than just a tip from a person or two. Technical analysis is a good way to go although you should keep in mind that nothing is foolproof.

    A great guide (FREE) is available at http://cli.gs/FreeGoldTips

    That information guide is written by experts so should be a great starting point.

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