Our Favorite Way to Invest in Gold Today

When the experts agree, take note... A 'chaos hedge' for your portfolio... The trouble with investing in gold miners... Our favorite way to invest in gold today... A smarter way to add gold to your portfolio... One misconception in today's commodities market...

Editor's note: We're wrapping up our five-part series of guest essays from some of Stansberry Research's top analysts. This week, we've heard about bitcoin and blockchain technology, Netflix's troubled business model, the downside of share buybacks, and why it's a good time to take some risk off the table.

In today's Digest, our resident commodities guru Bill Shaw discusses his favorite type of gold stock...

When the financial elites agree, it's worth paying attention...

Earlier this month, I (Bill Shaw) attended the 44th annual New Orleans Investment Conference. Dozens of respected speakers – such as Grant's Interest Rate Observer editor Jim Grant, The Gartman Letter editor Dennis Gartman, and master speculator Doug Casey – shared their thoughts on the markets and the current economic and geopolitical issues around the world.

If we could sum up the speakers' sentiment in one word, it would be "uncertainty."

Most of the speakers hesitated to make any bold predictions for the next year. They talked about many issues my colleagues have discussed in the Digest for months – the world's staggering $250 trillion in debt, central banks' attempts to "normalize" interest rates, the effects of the midterm elections, ongoing "trade wars," and the turmoil in the Middle East.

This geopolitical and global economic uncertainty suggests it's a good time to buy our favorite 'chaos hedge'...

No one can know the future. But most of the conference's speakers agreed on one thing: It's more important than ever to have some of your portfolio in gold and gold stocks.

Time and again, we've recommended gold as a form of "portfolio insurance." Investors historically flock to "safe haven" assets like gold during times of economic crisis. With the bull market now approaching its 10-year anniversary, the odds of a recession are increasing.

We're already seeing an increase in volatility in the markets. Last month was one of the worst for stocks since the Great Recession. Markets around the world lost $5 trillion during the month, with the S&P 500 down 7%.

Meanwhile, gold prices rose, just as we expected. When disaster strikes, you'll sleep better at night knowing you have a little extra protection in your portfolio.

And there's no better time to buy gold than right now...

We believe the bull market's next leg higher is imminent. We've covered these issues in Stansberry Gold & Silver Investor since launching the product in early 2016.

Irresponsible monetary policy from central banks around the world has led to a giant credit bubble. Global debt is at record highs. Excluding those on credit watch, U.S. corporate downgrades hit 759 this week – slightly behind the 811 we saw in 2016, but already exceeding the 709 last year.

And we expect we'll see that trend continue to grow. As my colleague Mike DiBiase mentioned in Wednesday's Digest, corporate debt in the U.S. totals $9 trillion – up more than 50% from the end of the 2008 crisis. As measured against GDP, corporate debt in America has never been higher...

But it's not just the quantity... it's also the quality. As Mike told readers...

Today, $3 trillion of debt is rated at the lowest level of investment-grade debt – by far the most than at any other time in history. These companies are teetering on the edge of becoming junk credits. By taking on more debt to buy back their own stock, they risk a credit rating downgrade and much higher interest costs.

Not only that, the cost of debt is increasing, too. After a decade of artificially low interest rates, rates are on the rise once again, making debt-funded buybacks more expensive. Many companies are bloated with debt and can barely afford to pay the interest today.

Then, there's sentiment...

Longtime readers know we look for contrarian investment ideas. Today, buying gold is about as contrarian an idea as you can find in the markets. In fact, based on the Commitment of Traders report, we haven't seen gold this hated since 2001 – right before the precious metal rose from less than $300 an ounce to more than $1,900 an ounce over the next decade.

Obviously, we can't know if we will see similar gains from here. And gold prices could fall again before the uptrend continues. (As our friend Jim Rogers likes to say, prices can soar higher than you expect... and fall further than you can imagine.)

We know volatility is tough on most investors. But you must learn to embrace it... not run from it. That conviction will allow you to buy low and sell high.

And with gold this hated and quietly starting an uptrend, we like our chances right now. You should, too...

One of the best-known speakers at the event in New Orleans was Rick Rule...

Rick is the president and CEO of natural resources investing firm Sprott U.S. Holdings. As longtime Stansberry Research readers know, Rick has spent decades investing and speculating in natural resources, making billions of dollars for himself and his clients. He has an encyclopedic knowledge of the mining industry and individual companies.

At the conference, Rick revealed how he's going to put some of his own money to work in the coming months.

He's going to buy precious metals streaming and royalty companies.

Rick highlighted the superior business models that these companies employ, since they're often a less-risky way to gain exposure to the price of gold than through mining companies.

You see, miners often have difficulty raising funds or obtaining financing...

Building and operating a mine is extremely capital-intensive and risky. And since a lot of mining companies have little or no revenue coming in, banks are typically leery about lending money to fund their exploration activity and mine construction.

Mining companies can also raise money by issuing more shares (and therefore diluting existing shareholders). Instead, a lot of mining companies turn to another method... "royalty" and "streaming" agreements. If you've been with us for long, you know that we're big fans of this business model.

In the precious metals sector, these companies provide upfront capital to gold and silver miners. They receive a royalty or a stream in exchange for their initial outlay. These companies can also acquire pre-existing agreements through takeovers of other businesses.

As with any royalty, a gold royalty is a small percentage of a mining company's sales. In the industry, it's typically referred to as a "net smelter return" (NSR). That's the revenue produced from the sale of the final product minus transportation and refining costs.

A stream gives the company the right to purchase the gold and silver at a predetermined price – typically at a fraction of what they're selling for in the open market. The company can then sell the metals at the spot rate and keep the difference as its profit.

We love royalty and streaming companies because they give us leverage to precious metals with much less risk...

After these companies make their initial upfront payments, they don't need to contribute any additional capital to maintain their stake.

You see, these companies collect revenue based on a mine's production – not its profitability. As part of their agreements, they receive a fixed percentage of revenue (or a fixed metal price) regardless of the price of precious metals.

Plus, they aren't exposed to risky capital expenditures ("capex"), such as ongoing exploration and production costs. Yet they still get a cut of any new discoveries that the miner makes on the property in which they hold a royalty.

To be clear, the prices of precious metals do affect the streaming companies' bottom lines. But as gold prices rise, their agreed-upon streaming prices remain locked in. These companies get all of the upside, with no extra costs. If gold trades for $300 per ounce above that level, they'll make three times more money than if it trades for just $100 above the agreed-upon price.

Over the long term, the investment advantages to royalty and streaming companies become even clearer...

You can see this dynamic at work in the chart below. It tracks the five-year performance of the price of gold versus the VanEck Vectors Gold Miners Fund (GDX) – which holds a basket of gold-mining stocks – and Franco-Nevada (FNV), the largest publicly traded gold royalty company.

As you can see, while gold prices are essentially flat, GDX shares have fallen around 10%. But due to its superior business model, Franco-Nevada's stock is up about 75%...

In other words, even when gold prices go nowhere, royalty and streaming companies can still make for a stellar investment.

But that's not the only reason Rick is planning to buy royalty companies...

He believes many investors are avoiding precious metals streaming and royalty companies because they think these companies have gotten so big that they'll be unable to grow. As a result, Rick says many investors believe these companies are overvalued today.

Based on his unique insight into the sector, though, Rick couldn't disagree more...

You see, besides managing investors' funds, Sprott also lends capital to mining companies. Therefore, Rick is in direct competition with the streaming and royalty companies. He has seen the deals take place... And he emphatically believes there's still room for growth.

Rick is one of the industry's experts. We trust his expertise, especially because it's rare to hear gurus like him share ideas that might go against their own financial interests.

Rick's bullish stance is just one reason I recently recommended a royalty play to my Commodity Supercycles subscribers...

This world-class company has little debt, hundreds of millions of dollars in free cash flow, and billions of dollars' worth of assets in stable political jurisdictions.

In a volatile market, gold royalties are one of the best ways to get defensive... and bolster your portfolio with a bit of extra insurance. Don't wait until it's too late.

New 52-week highs (as of 11/29/18): McDonald's (MCD), Service Corporation International (SCI), and Walgreens Boots Alliance (WBA).

We continue to receive more positive feedback on Mike DiBiase's essay on share buybacks. Let us know what you thought of this week's Digest series at feedback@stansberryresearch.com.

"The best two Digests you have ever published! History tells us that Netflix will have to fix their core or die. I can give you several examples of how companies stopped growing their base and negative FCF killed them. Buybacks are a negative force that will kill many companies as well. Beautifully written." – Paid-up subscriber Kenny G.

Mike did a great job writing his essay on the hidden driver behind the bull market – stock buybacks. Well written and documented. I'm sure it is timely as well. Thanks." – Paid-up subscriber T.K.

"Thanks for your interesting article on corporate buybacks. However, it does bring up a few unanswered questions. So, how does the individual investor know whether the company has recently bought back shares, and how many; was it significant enough to affect share price. Were they purchased with available cash or debt, and were they purchased merely for the pleasure of its executives? How does one know? Thanks for your response." – Paid-up subscriber Jerry S.

Mike DiBiase comment: That's a great question, Jerry. Unfortunately, Yahoo Finance's data on share repurchases aren't especially reliable. And unless you have access to a Bloomberg terminal, your best bet is digging through a 10-K or 10-Q filing with the U.S. Securities and Exchange Commission ("SEC").

If you're up to the challenge, look at the statement of cash flows and calculate the company's free cash flows. That's net cash flow from operating activities minus capital expenditures. That number – its free cash – should be greater than the cash spent on share repurchases, which is another line in the statement of cash flows. If it's not – and the company isn't sitting on a giant pile of cash – it's likely using debt to fund its purchases. You can look back over several time frames to see if it's a consistent offender.

Regards,

Bill Shaw Baltimore, Maryland November 30, 2018