With the odds now stacked largely in favor of a 0.25% interest rate hike at next week’s FOMC meeting, the price of gold is positioned to move back over $2,000 an ounce by early February.
According to the CME FedWatch Tool, there is now a 99.1% probability that the Fed will hike rates by 0.25%, compared with the 0.5% hike in December. That’s bearish for the U.S. dollar and bullish for gold.
Source: CME Fedwatch Tool
So that gives us one week to prepare.
There are several different ways to invest in gold; each has its own advantages and disadvantages.
The most traditional and direct way to invest in gold is owning physical gold bullion — coins like the American Gold Eagle or bullion bars.
Physical bullion offers investors safety not only as an economic hedge but also as practical wealth protection. Bank and crypto accounts are broken into all the time. Crypto exchanges like FTX wind up bankrupt. No one is going to hack into your physical bullion to deflate its value.
But physical gold bullion isn't a perfect asset. You have to store your physical gold somewhere, and it costs money to transport it.
Physical bullion’s biggest downside, however, is liquidity.
Physical gold bullion is a mostly liquid asset, but it’s definitely not as liquid as stocks, cryptos, or other digitally traded assets. To sell a significant amount of gold and get payment typically takes a few days. Gold is more liquid than something like real estate, but it’s not the most liquid asset.
Gold mining stocks also offer investors a good way to get exposure to rising gold prices, but they typically involve varying levels of risk. If they are actually mining gold and making money at it, many companies only operate one or two mines. That means they’re only a slowdown or shutdown away from seeing their stock plummet — and in mining, there are always slowdowns or shutdowns.
But there is a third option available to investors that offers a safer way to invest in gold without owning the physical metal in any way or taking big risks with mining.
It's what is known as gold royalty and streaming companies.
A gold royalty and streaming company generates its revenue from royalty payments from gold mines and/or streaming deals with other gold miners.
A gold royalty payment is a percentage of a mine's production or revenue that companies receive in exchange for an upfront payment.
A gold streaming deal describes an agreement in which a company provides cash upfront for the right to buy gold at reduced prices in the future.
These companies make various agreements with other companies to receive small royalty payments or make streaming purchases, and a lot of small royalty payments and streaming deals add up to a big business. The larger gold royalty and streaming companies have interests in hundreds of mining assets around the world with market caps in the tens of billions, and they’re pretty much the safest option among gold stocks.
Here are the big three gold royalty companies…
Gold Royalty Stocks
Franco-Nevada (NYSE: FNV) is the largest gold-focused royalty and streaming company with more than 400 assets across what it claims is the world's most diversified global portfolio.
Like most other royalty and streaming companies, Franco-Nevada is not a pure gold company. Instead, it has a large portfolio of diverse projects from which the company generates revenue.
Approximately 70% of the company's revenue comes from gold mining. The rest of its revenues are derived from silver (11%), platinum group metals (8%), energy (9%), and other minor assets (2%).
Almost half of the company's revenue is derived from Latin American countries, and much of the rest is derived from its North American assets. Franco-Nevada earns about 18% of its revenue from the U.S. and 19% from Canada.
Franco-Nevada is the largest gold-focused royalty and streaming company with a market cap of over $28 billion, and it's one of the most well-known gold stocks in the entire precious metals sector. That makes it a buy target for investors of all levels, from Robinhood users to global investment banks. In a market hungry for gold, everyone is going to want a piece of FNV.
Wheaton Precious Metals (NYSE: WPM) started its corporate life as Silver Wheaton in 2004 to establish itself as the world's primary silver-streaming company. But in 2017, the company changed its name and began focusing more on gold streaming.
Today, Wheaton Precious Metals is the second-largest gold streaming company by market cap with agreements for 20 operating mines and 13 development-stage projects.
Approximately 60% of the company's revenue is derived from gold-streaming deals. Another 36% comes from silver streams, and the remaining 4% comes from PGM and cobalt sales.
Most of Wheaton Precious Metals' assets are scattered throughout North and South America, but the company also has a handful of streams from operations in Europe.
Compared with FNV, WPM is slightly less focused on gold but more focused on precious metals overall. It's also another very well-known company within the gold sector with a market cap of more than $20 billion. So if you don't want any energy exposure in your gold-streaming play, WPM might be for you.
Royal Gold (NASDAQ: RGLD) is another very well-known gold-focused streaming and royalty company with interests in almost 200 properties on five continents. Those include interests on 40 producing mines and 20 development-stage projects.
About 73% of the company's revenue comes from gold-streaming deals and royalties. Another 10% comes from silver, and another 14% from copper.
With a market cap of just over $8 billion, Royal Gold is the smallest of the three, but it's also the most directly exposed to gold.
Other gold stocks may be better leveraged for bigger gains because, like everything else, the bigger the risk, the bigger the reward.
But these three are perhaps the safest gold stocks to leverage rising prices.
