At this year’s Prospectors and Developers Conference (PDAC) in Toronto, everyone was focused on one thing…
Does the current run-up have staying power? Are gold prices poised to blast higher? Is the price manipulation over? And will tapering destroy the possibility of returning to the highs?
Luckily, I was in the perfect place to find the answer, because the conference was packed with gold dealers.
These are the guys who are either buying or selling gold at the retail level. So they’re one of the best gauges of real-time sentiment.
And even though they’re trained to be perpetually bullish, they often know exactly where prices are headed in the near term.
What I discovered doesn’t bode exceptionally well for the precious metal. But there’s still an opportunity to profit if you’re dead set on investing in gold…
Gold’s Fork in the Road
You see, the dealers still aren’t convinced that gold’s current run-up – from $1,180 to over $1,350 in the past couple of months – is the real deal.
They’re simply not seeing the type of retail buying they witnessed during the massive jump to $1,900.
Instead, they’re seeing smaller sales, which isn’t indicative of a rush to buy bullion.
Don’t let that discourage you, though.
I think it’s prudent to look at gold’s recent run with a bit more optimism.
After all, gold prices seem to have bottomed around $1,180. This will be the significant support level that could be tested again.
And when you consider where to invest, look no further than the mining sector.
The Best Way to Profit From Gold’s Potential Climb
There’s no question that mining stocks have the most to gain right now.
Consider that the PHLX Gold and Silver Mining Index (^XAU) is trading at 101.42. That’s still down significantly from its 52-week high of 154.
So mining stocks have a lot of catching up to do!
If you’re interested in taking advantage of any upward momentum, there are four companies in particular that you should watch: Franco-Nevada (FNV), Silver Wheaton (SLW), Royal Gold (RGLD) and Eurasian Minerals (EMXX).
All four are unique in that they’ve adopted (or are tilted towards) a royalty model.
This means they participate in the metal’s production by getting a piece of each dollar sold, as opposed to actually mining and processing the physical metal.
The companies pull this off by entering agreements where they “buy” future production by investing money in the miners’ operations.
It’s kind of like interest on a loan, only in this case, the interest is paid from the proceeds of gold or silver sales.
In some cases, the companies are mine prospectors that sell off mines to developers in return for cash or a future royalty stream. The bottom line is that they don’t want to bear the cost of mining and processing, for the most part. There are exceptions, and I’ll cover that one, too.
Of the four, Silver Wheaton is a combination miner and royalty company. It operates a bunch of very profitable silver mines, and collects a stream of royalties from others.
Franco Nevada and Royal Gold are pure royalty plays. They’ve performed the best during the downturn and have participated fully in the upturn.
Eurasian is a much smaller, speculative player that prospects for minerals – and then sells its finds or enters into joint ventures. It doesn’t do any actual mining, but makes money purely from royalties and joint ventures. So it can essentially abandon a mine – yet still turn a profit.
Bottom line: Royalty plays give you both the upside when gold prices rise – and a cushion when they fall, as their cost of operations is significantly lower than a conventional miner. If you’re looking to “play” gold, then this is the way.
Ultimately, the question now is if these companies can make money with gold trading at $1,350.
And “the chase” continues,