Keep in mind that making gold and silver investments through mining companies and royalty/streaming companies comes with high risks. Thus, if you have a low tolerance for risks, then you should consider the safer methods of buying physical precious metals and investing in their virtual counterparts, namely, options and ETFs. But if you’re looking for a risky challenge, and make more money from it, then consider these two methods.
Gold and Silver Mining Companies
There are several gold and silver mining companies that allow the general public to make an investment, usually through the purchase of common and preferred shares, among other choices. Just take a look at your favorite stock exchange, such as the New York Stock Exchange (NYSE), and you will find more than a handful of these publicly-listed companies.
Alternatively, you can look into ETFs with a basket of miners. This works in the same way as ETFs holding precious metals so it should be a cinch if you’ve already invested in them.
In theory, the main advantage of investing in mining companies is their ability to overcome issues related to precious metals investments. For one thing, mining companies generate cash flows, provide dividends to their shareholders, and sustain their operations for several years; in contrast, precious metals themselves not only require management costs but don’t generate cash flows. As an investor, you have the benefit of buying and selling your investments for a profit and getting the dividends, among other perks.
But remember that gold mining companies are levered against the precious metal. While gold prices may either halve or double over several years, such as from a high of $1,600/ounce to a low of $800/ounce and vice versa, the stock prices for a gold mining company can substantially swing, say up and down 5 to 10 times! Just imagine the risk that you’re taking and consider it with the possible rewards that may be coming.
Let’s assume that a XYZ, gold mining company, has a $1,000/ounce free cash flow breakeven point meaning gold prices above $1,000/ounce results in positive free cash flow. At $1,100/ounce, it’s making $100/ounce in profitable free cash flow and when it’s making $1,500/ounce, it’s reeling in $500/ounce; the assumption here is that the overall costs remain approximately the same in both cases.
At these prices, XYZ enjoys a jump in profits of 400% even as the gold prices rose only 36%! You, an investor, is happy because it will mean more dividends coming your way and more value to your investment.
Even when gold prices gradually fall to $800/ounce, you can wait until better prices come along. But XYZ isn’t as comfortable waiting it out because if the low prices goes on for a prolonged period, it can easily become bankrupt – and you, the investor, will be at the losing end, too.
The bottom line: While gold and silver mining companies can be good investments, remember that these are high-risk investments. You should ideally have a hedge against the volatility of the market.
Gold and Silver Royalty/Streaming Companies
In our opinion, gold and silver royalty/streaming companies are the better choice. Basically, these companies provide the financing for the gold and silver mining companies. The former provide the cold cash up front toward new mine development and, in exchange, have the right of either getting a specific percentage of the final output or purchasing a specific quantity of gold at prices far below the current market price.
These companies also manage a few or several existing streams while also making new investments in other prospective mining companies and, thus, acquiring future streams. The fact that there’s a combination of present and future streams means that investors in royalty/streaming companies, such as yourself if you decide to become one, will likely have a stable, more or less, income stream of their own.
In turn, mining companies like royalty/streaming deals because of the many benefits that come from it. It carries less risk for them since their debts, so to speak, to the royalty/streaming companies go up and down with the gold and silver current market prices and so do their profits. In contrast, a normal debt transaction is riskier because the debt provisions remain the same regardless of the price movements of gold and silver.
For an investor like yourself, investing in royalty/streaming companies also means a less levered and less risky way of earning money in comparison to investing in the mining companies. There’s also the fact that, historically speaking, royalty/streaming companies have outperformed mining companies, as well as paid dividends more.
Of course, there are always risks when investing in both mining companies and royalty/streaming companies, as is the case when you’re investing in all types of precious metals. You have to protect yourself and your investments from the extremes of market volatility by acquiring as much knowledge and skill about precious metals investments.