Are These the 3 Best Ways to Get Rich From Gold?

Investors wanting to diversify their portfolio into gold have typically chosen either gold miners or gold coins. This article explores three better alternatives that have proven themselves over time and could generate enormous total returns over the next decade.

Jul 13, 2014 at 9:41AM

In the last decade gold has seen its price triple, yet investors in gold mining stocks have mostly been disappointed. The AMEX gold miners index is up only 2.3% including dividends, woefully underperforming the S&P 500's 116% total return. 

^GDM Chart
^GDM data by YCharts

As the above chart shows, Royal Gold (NASDAQ:RGLD), Silver Wheaton (NYSE:SLW) and Freeport-McMoRan Copper & Gold (NYSE:FCX) have handily beaten the market, gold miners, and even the rise in gold prices. This article will explore why these three companies represent the best long-term way to get rich from gold. 

Freeport-McMoRan: diversified miner with booming oil growth catalyst
The investment thesis for Freeport-McMoRan consists of three parts: diversification, a strengthening balance sheet, and its potential as a major energy producer.

Freeport-McMoRan is not only a miner of gold, but also of molybdenum, copper, and now an oil and gas producer. In 2013, Freeport acquired $19 billion in oil and gas resources, leaving it with $19.7 billion in current debt and 861 million barrels of oil equivalent reserves and 176,000 barrels/day (13.4 years) of production.

Freeport-McMoRan is currently planning on lowering its debt by 61%, to just $12 billion, by 2016. This will immensely strengthen its balance sheet, although at a interest coverage ratio of 27.4, Freeport-McMoRan is already one of the most financially sound miners in the industry.

In order to achieve this immense debt reduction Freeport-McMoRan is selling off certain assets such as some of its acrage in the Eagle Ford shale and its Candelaria copper mine, and it's investing in more promising areas such as the Haynesville shale and deepwater oil assets in the Gulf of Mexico.

Despite these sales Freeport-McMoRan still plans to expand its copper production by 39% from 2013 through 2016 thanks to expansion at five megamines capable of producing over 1 billion pounds of copper annually.

Analysts are expecting massive earnings growth acceleration from Freeport-McMoRan over the next decade due mainly to its energy segment, which is expected to account for 32% of 2014 EBITDA.

With its 5 trillion cubic feet of natural gas in the Haynesville shale ideally located to serve America's coming LNG export boom and its high quality deepwater gulf assets, Freeport-McMoRan's energy segment will drive strong growth in its generous yield and long-term share price.

Company Yield 10 Year Projected Annual Dividend Growth Rate 10 Year Projected Annual EPS Growth Rate 10 Year Projected Annual Total Return
Royal Gold 1.10% 8.02% 12.80% -1.10%
Silver Wheaton 1.10% 23.44% 35% 27.20%
Freeport-McMoRan 3.60% 23.32% 41.80% 48.60%

Sources: S&P Capital IQ, Yahoo Finance

Royal Gold: master of high margin gold
Royal Gold operates with my favorite business model for precious metals. It acquires royalty rights and streams excess capacity from regular miners. This means it pays an upfront fee in exchange for a percentage of a mine's production, but usually at substantially reduced rates. 

Royal Gold essentially acts like a financier for miners, something that is necessary since the cost of a new gold mine has soared 311% to $2,300/oz in the last decade. 

Royal Gold maintains minimal overhead and is requires no capital expenditures or exploration risk. Its low costs make it one of the most profitable companies in its industry, with a net margin of 25.6% compared to a negative margin for its average peer.

Royal Gold has surged 86% in the last year, due to signing major contracts with miners that will increase gold production 65% this year. 

The current valuation is 68% above above its 21-year average, which is why analysts believe the stock will underperform over the next decade. My advice to interested long-term investors is to put Royal Gold on a watch list and wait for a pull back, inevitable in a cyclical industry such as this.

Silver Wheaton: undervalued silver and gold streamer
Silver Wheaton is my favorite way to invest in both silver and gold for three reasons: valuation, very low costs, and superb growth prospects. In 2011 Silver Wheaton's production was 97% silver, but gold is expected to make up 31% of production and 33% of revenues by 2018.

Silver Wheaton's production of silver and gold is expected to increase by 35% and 61.3% respectively by 2018. With its ultra-low cost for of  just $4.12/oz for silver and $386/oz for gold, Silver Wheaton is poised for immense growth in the next decade should silver and gold recover. With a 48.3% net margin and a low payout ratio of 34%, Silver Wheaton has the potential to be a strong dividend growth stock over the next decade as well.

Foolish takeaway
The best way to profit from gold is to invest in companies that have proven operational leverage to the price of gold, low costs, and or diversification into commodities with strong growth catalysts such as oil and gas.

The highest profit margins belong to precious metal streamers such as Royal Gold and Silver Wheaton. Silver Wheaton makes a better buy today due to a historically low valuation, but Royal Gold deserves a place on your watch list. Freeport-McMoRan is a great way to invest in the overall growth of the global economy and pays a generous dividend that's likely to grow quickly over the next decade, resulting in market-beating total returns.  

Top dividend stocks for the next decade
The smartest investors know that dividend stocks simply crush their non-dividend paying counterparts over the long term. That's beyond dispute. They also know that a well-constructed dividend portfolio creates wealth steadily, while still allowing you to sleep like a baby. Knowing how valuable such a portfolio might be, our top analysts put together a report on a group of high-yielding stocks that should be in any income investor's portfolio. To see our free report on these stocks, just click here now.

Adam Galas has no position in any stocks mentioned. The Motley Fool owns shares of Freeport-McMoRan Copper & Gold and Silver Wheaton. (USA). Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.


Compare Brokers