This Is How I Would Invest In Gold

EDITOR'S NOTE: If you clicked to this story from My Fool Daily on Oct. 17, 2013, we apologize. The link is from April and was included in the email by mistake. For a more up-to-date lead story, please click here.

I'm not much of a gold investor; however, as someone that likes a good value, the recent sell off in gold has caught my eye. I've never really understood why investors are so drawn to the metal, especially when I have concern that market manipulators are really a big problem. That being said, if I were to lay down a chunk of change on that shiny metal, other than to buy my wife a gift, I think I've found the investment of choice.

Before I get to that company, bear with me as I dig deeper into what I won't be buying. Topping the list is gold ETF SPDR Gold Trust (NYSEMKT: GLD  ) . Because its job is to track the price of gold, you're basically holding paper that's worth is tied up in the market's sentiment. That just doesn't work for me, I'm an investor in businesses and not in ticker symbols.

The problem is, the gold mining business is a risky one, to say the least. The operational risks can really affect the performance of the company relative to its peers. Cost overruns when expanding production can be so severe it can lead to very costly future write-downs. Further, work stoppages are common -- just last week Barrick Gold (NYSE: ABX  ) was forced to halt construction work on the Chilean side of one of its mines, for the project is causing environmental damage.

To alleviate some of these operational risks I could invest in a top-tier gold miner like Goldcorp (NYSE: GG  ) . It's one of the largest pure-play gold miners. Because of its large scale, it has a very low cost of production. However, you're still subject to all the risks I previously mentioned which could tarnish the investment.

Another option is to turn to a more diversified miner like Freeport-McMoRan Copper & Gold (NYSE: FCX  ) . As the name would imply, the company has a large copper operation, in fact it's the second-largest producer of copper in the world. What the name doesn't imply, is that the company has diversified further, this time into oil and gas production. That diversity could really help to alleviate some of the specific operational risks of mining. However, if you want a pure play on pure gold, then you'd probably not care much for diversification.

With that as a back drop, I've found what I think is a better solution to the risks of investing in gold while sticking with a more pure-play investment. The solution is to invest in a gold streaming company, and the one I like most is Sandstorm Gold (NYSEMKT: SAND  ) . It's a lower-risk gold company, as you're still levered to the price of gold and to exploration upside; however, you're not exposed to the risks of capital expenditure overruns. Led by the former CFO of silver streamer Silver Wheaton, the company is taking that proven business model and turning it into golden returns. It's that proven leadership that has caught my eye.

To understand the business of gold streaming, Sandstorm has a great slide in its recent investor presentation that's worth a look:

Source: Sandstorm Gold Investor Presentation

It's this model that makes me think of Sandstorm as more like a venture capital company with a twist. It provides the gold miner with some of the initial funding it needs to get a mine into production. It then has the right to buy gold from the producer at a very low fixed cost. It can then resell that gold at a very high margin and then pocket the difference. 

You're still subject to much of the volatility and market sentiment of gold, but that exploration upside provides a longer-term lift to profits. While there are other larger gold streamers, I like the management team and growth prospects at Sandstorm a lot better. It is a small company and it's not without risks, but it is the one gold company that's really caught my eye.


Read/Post Comments (7) | Recommend This Article (7)

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 October 17, 2013, at 5:53 PM, AnsgarJohn wrote:

    I am a novice, but I tried to do the math on Novagold because Seth Klarman is an investor, seems pretty interesting too (a lot of gold in the ground for not much money), but it doesn't generate cash flow so I am not investing.

  • Report this Comment On October 17, 2013, at 7:27 PM, kbeck02 wrote:

    I did "click here" and got this "Let's Not Do This Ever Again By Morgan Housel | More Articles | Save For Later October 17, 2013"

    Something is amiss!

    An April 15, 2013 article about gold written by someone who openly admits he "not much of a gold investor" seems somewhat useless, at best.

  • Report this Comment On October 17, 2013, at 8:41 PM, TMFmd19 wrote:

    Just for the record, I do still like Sandstorm Gold's business model as the best way play gold for the reasons mentioned in the article.

    Matt

  • Report this Comment On October 17, 2013, at 9:10 PM, TMFBane wrote:

    @kbeck02,

    Sorry for the confusion. Yes, the gold piece above was from April, and it mistakenly made it into today's email. In the editor's note at the top of this piece, we provided a link to a more timely top story from today.

    Again, we apologize for the error.

    Foolishly,

    John Reeves

  • Report this Comment On October 17, 2013, at 9:20 PM, cdburt wrote:

    I have invested in Royal Gold Inc. and at first it did very well, but went bad with the gold sell off. I sold an Oct 13 45 call on my position and had to buy it back today in order to keep my stock. The trend of the underlying stock seems to be improving, but it needs to go a long way to get back to the price where I originally bought it. What do people think of RGLD?

  • Report this Comment On October 17, 2013, at 9:21 PM, duuude1 wrote:

    Well, the "Let's Not Do This Ever Again" title you clicked on could easily apply to gold as well!

    Shouldn't Fools be pretty much in synch that a lump of metal that produces no income is not an investment... buying gold in response to fear-mongering is yielding a rational investing mind to an irrational hoarding mentality...

    "Let's Not Do This Ever Again" - amen!

    Duuude1

    (p.s., How the heck did I get to this article??)

  • Report this Comment On October 17, 2013, at 11:24 PM, gesheddc wrote:

    I'd be interested in investing in gold, and other metals, if I could be assured that the company I was investing in didn't depend on slave/child labor. I've just read too many stories . . . .

Add your comment.

DocumentId: 2688588, ~/Articles/ArticleHandler.aspx, 7/22/2014 7:46:46 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement