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Worried About the Economy? This Is the Best Gold Stock to Buy
By: Motley Fool | May 21, 2018

Some investors turn to owning gold when the economy stumbles. But this gold streaming stock is an even better buy.

A growing chorus of top Wall Street analysts, all-time great investors, and local barbers around the country are echoing a bearish sentiment about the American stock market. While the economy is humming along and stocks are at all-time highs, a brief look at historical averages suggests both might be overdue for a cool down. There may not be a hard rule on when either occurs, but the fact is that the stock market has only been more expensive relative to earnings twice in history: on Black Tuesday in 1929 and at the height of the dot-com bubble.

That's not exactly great historical company. That also explains why gold fever is spreading among investors again, as it inevitably does when economic conversations turn gloomy. I think it's better to buy and hold stocks for the long haul, but for those considering buying gold directly, I'd encourage a different strategy. That is, buying the best gold stock instead: streaming company Royal Gold (NASDAQ:RGLD).

By the numbers

If you aren't familiar with the company, then there are a few things you should know about Royal Gold. The most important is that it doesn't partake in the risky business of mining and extracting gold, which is subject to costly development and regulatory considerations. Instead, the business enters into agreements with miners to provide upfront cash payments in exchange for the right to purchase minimum quantities of precious metals for a certain duration of time.

Here's the important part: Royal Gold agrees to purchase precious metals at prices investors could only dream of -- sometimes representing just 30% of the spot price of gold or silver. That leaves considerable upside that's clearly reflected in the financial statements.

Consider that through the first nine months of its 2018 fiscal year, Royal Gold reported $342 million in revenue and adjusted operating income of $128 million. In other words, the business converted 37.5% of sales into operating profits.

Well, it would have, if not for taking a non-cash impairment charge of $239 million ($185 million net of taxes) after Barrick Gold announced delays at its Pascua-Lama mine in South America. Royal Gold has a streaming interest in place for the mine, so the delay forced it to recalculate the net present value being carried on its balance sheet. While that shows that the company is still somewhat exposed to the risks inherent to the mining industry, the stock barely budged on the revelation. Why not?

Well, Royal Gold still boasted $2.5 billion in streaming and royalty assets on its balance sheet at the end of the fiscal third-quarter 2018 (ended in March). More important, the impairment didn't affect current operations, which continue to get stronger and more profitable.

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