Royal Gold: What’s Up?

by JDH on March 1, 2014

Let’s start with two charts.  First, gold:

Gold-Feb-28-2014

Next, the chart of RGL.TO – Royal Gold Inc. for the same time period.

RGL-Feb-28-2014
From a low of around $1,180 on New Year’s Eve, gold peaked over $1,340 this week, for a gain of about 13.5%.  Not bad.

Royal Gold has risen from a December 23, 2013 closing price of $46.87 to a close of $76.10 on Friday, for a gain of 62%.  Pretty good.

So why is gold up 13.5% but Royal Gold is up 62% in roughly the same period?

The obvious answer is leverage.  Gold stocks are leveraged to the price of gold, so if gold increases by x, the price of a stock can increase by 2, 3, 4 or more times x.  That explanation makes sense, because in a gold mining operation a lot of the costs are fixed, so once you mine enough gold to cover your fixed costs a big percentage of marginal revenue is profit.  Makes perfect sense.

If that’s true, why haven’t other gold stocks also increased by 62% in the same period?

Blue chip FNV.TO – Franco-Nevada Corp. has gone from around $42 to $59 during this period, but that’s only a 40% increase.

Another bule chip, G.TO – Goldcorp Inc. went from $22.25 to $30.71, and increase of 38%.

I could list a few more, but you get the idea; Royal is outperforming.  Why?

My theory is that the powers that be are realizing that gold is here to stay, and the beat-down over the last two and a half years is over, and it’s time to get back into the sector.  They don’t want to gamble on junior miners, so they pick a quality blue chip that pays a decent dividend, and that’s where they are plowing their money.  Even on down days, it doesn’t go down, much.

Is this the canary in the coal mine, telling us that the bear market is over?

Yup.

I’ll leave you to ponder that thought, until next week.