As Good As Gold? Not Any More….

Is anything left “As good as gold?” Language humanities explains:

“Gold has been exchanged as a form of currency for thousands of years. …. The metal has also been used to bring value to a nation’s currency, a practice known as the gold standard. Many forms of money, including the American dollar, were originally valued by how much gold they theoretically equaled. This currency was thus “as good as gold.”

In the early 1900’s US dollars were backed by gold. Cheap money fueled the “roaring 20’s.” High risk speculation led to thousands of bank failures followed by a run on banks; citizens redeeming their dollars for gold.

Harley Hahn adds:

“Roosevelt had to stop this…he decided to change the system.

…. Roosevelt nationalized gold for two reasons. First, he wanted to stop the run on the banks. Second, he was planning a number of expensive social and economic programs and he needed money to finance them.

Controlling the gold supply would give him more control over the money supply.”

Roosevelt confiscated the gold, and unilaterally revalued it from $20.67/oz. to $35.00/oz, magically creating an additional $3 billion out of nothing to use for social programs.

Hahn continues:

“However, he did so at a cost. …. Roosevelt effectively devalued U.S. paper money by 41 percent. …. He initiated a process that was potentially dangerous.

If the U.S. ever went off the gold standard completely, and the government did not have the discipline to keep from creating too much new money, there would be trouble.”

President Kennedy eliminated the dollar silver certificates and President Nixon closed the gold window entirely, completing the process. “Good as Gold” has now degraded to nothing more than a politician’s promise!

The New Game

Politicians are incapable of fiscal discipline. Government debt is quickly approaching $40 trillion.

Interest on the national debt skyrocketed to over $1 trillion annually. With no metal left to revalue, politicos use the Fed to create money out of thin air. Currently the Fed holds approximately $7 trillion phony dollars, fueling the politicos’ desires.

The government is broke; yet continues to spend at a record pace. Whistle blowers, reporting billions in government fraud and waste are being chastised; no attempt at government sanity has been implemented.

The Baby Boomer (1946-1964) generation is now eligible for Social Security. While they played by the rules hoping to enjoy their “golden years” in retirement, they are in for a shock.

Over the last 20 years, using phony government numbers, inflation has increased a cumulative 69.1%.

So, how about gold?

JM Bullion supplies the data.

“Gold investors have been on quite the ride in the past 20 years. An ounce of gold has increased in value 11 times over.”

The Retirement Challenge

The dollar lost 69% over the last 20 years, while gold increased 11 times over. Baby Boomers face a high probability of inflation destroying the value of their life savings before their judgment day.

Don’t look to the government for help. Printing and spending phony money, while blaming their political opponents is their solution of choice.

My Personal Journey

The 2008 bank bailout was a wakeup call. I realized the government was hell bent on increasing the money supply; inflation would eventually get ugly and current interest rates were negative. My retirement plan would no longer work!

I needed help.

All Gold Is Not Equal

I began with “core holdings” – physical gold. Why not buy the real thing? Gold has done the job for centuries. Gold is good, paper money eventually becomes worthless….

I joined Casey Research. They had some true experts on gold mining stocks, touting spectacular gains with many of their recommendations. I soon learned all mining stocks are not equal….

Investing in mining exploration companies is high-risk speculation. Explorers use investor’s money – hoping to find gold – resulting in spectacular gains. They would find “proven and probable reserves,” then sell out to mining companies to harvest their findings. While hitting the jackpot is terrific, this was speculation with more losers than winners.

Investing in larger mining companies looked appealing. Once they invested millions to reap the harvest, their costs are primarily fixed. Each dollar increase in the market price increases profits dramatically.

I discovered a potential flaw. Environmentalists and opportunistic politicians could easily tax and shut down a mine quickly, resulting in catastrophic losses. Diversification, coupled with extensive knowledge of the business is a necessity for success.

At the big dinner in my first Casey Conference, I was lucky to be seated with executives of a newly formed royalty company, Silver Wheaton (Now Wheaton Precious Metals, symbol WPM). I’d never understood their business. They were good educators.

Mining Royalty Companies

Mining royalty companies fill a unique need in the market. The World Gold Council estimates between 1-5 years to build a mine and surrounding infrastructure before producing gold for the market. It’s a very expensive process. Using traditional financing, or selling additional stock (diluting equity) can be very expensive.

Mining royalty companies provide a different option. They provide funds, or arrange financing at a lower rate, in exchange for future income from the product produced.

Each royalty stream is negotiated with a wide range of options. The goal for the royalty company is to have a solid floor with unlimited upside profit potential. Their royalties can easily dwarf the interest they would have earned with traditional lending.

Samuel Jeffrey writes an extensive primer, Mining Royalty Companies: Steady Returns on Precious Metals:

“Mining royalty companies offer an intriguing gateway into the world of precious metals investing. They generate steady revenues without having to build mines, operate complex machinery, or worry directly about workforce challenges in remote regions.

These specialized entities focus on securing royalties or streaming agreements, which entitle them to a slice of production—or the right to purchase a fixed portion of production at a discounted rate—from a variety of mining projects. The result? They can achieve stable cash flows and gain leverage to rising precious metal prices—often with less exposure to the operational pitfalls that plague traditional mining firms.

…. Moreover, these companies come in different flavors. Some target only gold, while others diversify into silver, copper, nickel, or even battery metals like cobalt. Some prefer advanced-stage mines that are already producing, while others take on more speculative agreements to secure royalties on projects still under development. This broad spectrum means investors can choose royalty companies that align with their own risk tolerance or commodity outlook, be it gold-centric or more wide-reaching.”

He explains the difference between traditional mining companies and royalty companies:

“Mining royalty companies, by contrast, are largely hands-off. They don’t manage drilling schedules or run a fleet of trucks. Their primary tasks revolve around:

• Finding Deals: Seeking out operators that require capital.
• Evaluating Project Feasibility: Conducting geological, financial, and political risk assessments.
• Negotiating Royalty or Streaming Contracts: Deciding on an upfront payment, the percentage of revenue or the discounted purchase price, and other contractual details.
• Ongoing Monitoring: Tracking output, verifying production reports, and collecting their share of revenue or precious metal deliveries.

It’s akin to being an investor rather than a business owner in the traditional sense. They front money, then collect a slice of the spoils. This can be more stable. Yet, it also depends heavily on the skill of management to pick projects that will ultimately deliver consistent production and endure cyclical metal price swings.”

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Mr. Jeffrey outlines “notable” mining companies; Franco-Nevada, Wheaton Precious Metals, Royal Gold and others.

Physical metal makes up our “core holdings.” While our core holdings have appreciated nicely, we hope things never get so bad that we have to sell to stay afloat.

However, as a retiree, we have ever-increasing bills to pay. The remainder of our portfolio must grow safely ahead of inflation, so bills can be paid and we can sleep comfortably.

We’ve invested in the three companies mentioned and they have shot up along with the price of metals over the last few years. Here is a shot of WPM over the last ten years. (courtesy of Stock Analysis)

Dividends on all three have increased, however, with the higher stock prices they pay less than 1%.

Samuel Jeffery concluded:

“Mining royalty companies can make sense if:

1. You’re Bullish on Precious Metals: You want leveraged exposure to gold and silver, but you’re wary of the high operational risks among pure miners.
2. You Appreciate Diversified Revenue: The idea of a portfolio spanning multiple mines, metals, and jurisdictions appeals to your risk management instincts.
3. You Seek Potential Income: Some of these firms pay reliable dividends or at least have a track record of returning cash to shareholders.
4. You Can Handle Commodity Cyclicality: You understand gold can swing widely and that short-term price dips might temporarily dent cash flow and share prices.”

I prefer royalty companies; their expertise, growth potential and ability to easily trade works for us.

It was easier to “take some profits” from the recent price surges by clicking a mouse to sell some shares, as opposed to finding a dealer, then negotiating a price for them to buy physical metal.

As inflation continues, boomers must find ways to protect their life savings from horrible inflation. Royalty companies are not quite “as good as gold,” there is some risk involved, but it is manageable. So far, they’ve done a darn good job.

If you are looking for alternative ways to offset inflation, royalty companies offer a good option.

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On The Lighter Side…

Last week we celebrated my 86^th birthday at the local burger joint, taking advantage of their $10 special.

I’ve written before about how moving to the world’s largest retirement community, The Villages, FL, caused me to rethink how I look about life and aging. Jo and I regularly visit our many town squares in the evening to take advantage of the live music.

The square if full of seniors dancing the night away and it is different. We saw a slim, trim lady in black leather pants and jacket, spiked red hair, grinning from ear to ear – as she held on to her walker. The next night we saw a lady, dancing by herself with a long cane while the music played. Then we realized she was blind as her companion came and led her off the dance floor when the music stopped.

While these folks may be in the last phase of life, they are balancing their time remaining following the mantra of wanting to live until I die. That’s a good thing. Jo and I count our blessings that we are able to enjoy life without too many health issues. Keep on keeping on!

Quote of the Week…

“Inflation is not caused by the actions of private citizens, but by the government: by an artificial expansion of the money supply required to support deficit spending. No private embezzlers or bank robbers in history have ever plundered people’s savings on a scale comparable to the plunder perpetrated by fiscal policies of statist governments.” —Ayn Rand

And Finally…

Friend Courtenay W. shares some clever quotes about aging:

• “The years between 55 and 75 are the hardest. You are always being asked to do things, and yet you are not decrepit enough to turn them down.” (T.S Elliot)
• “At age 20, we worry about what others think of us… at age 40, we don’t care what they think of us… at age 60, we discover they haven’t been thinking of us at all.” (Ann Landers)
• “When I was young, I was called a rugged individualist. When I was in my fifties, I was considered eccentric. Here I am doing and saying the same things I did then, and I’m labeled senile.” (Milton Berle)
• “The important thing to remember is that I’m probably going to forget.” (Martin Scorsese)
• “We don’t grow older, we grow riper.” (Pablo Picasso)
• “The older I get, the better I used to be.” (Lee Trevino)
• “Grandchildren don’t make a man feel old, it’s the knowledge that he’s married to a grandmother that does.” (Norman Vincent Peale)
• “When your friends begin to flatter you on how young you look, it’s a sure sign you’re getting old.” (Mark Twain)
• “You know you are getting old when everything either dries up or leaks.” (Dennis Quaid)
• “There’s one advantage to being 102, there’s no peer pressure.” (Adam & Eve)
• “There are three stages in man’s Life: he believes in Santa Claus, he does not believe in Santa Claus, he is Santa Claus.” (Leon Phillips)
• “Looking fifty is great — if you’re sixty.” (Joan Rivers)

And my favorite… (because it’s true)

• “It’s paradoxical that the idea of living a long life appeals to everyone, but the idea of getting old doesn’t appeal to anyone.” (Andy Rooney)

Until next time…

Dennis Miller

“Economic independence is the foundation of the only sort of freedom worth a damn.” – H. L. Mencken

 

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