Precious Metal Royalty Companies May Outperform Major Miners

by: Jeb Handwerger

Gold and Silver Breakout Before Labor Day

For several weeks, we have been attracted to silver (NYSEARCA:SLV) due to rising demand as a monetary metal and declining supply due to the lack of new discoveries. We recently sent out an update calling a silver breakout. Silver is beginning to outperform gold (NYSEARCA:GLD). The large miners (NYSEARCA:GDX) and the juniors (NYSEARCA:GDXJ) are continued to move higher ahead of Labor Day. Investors are returning to a new uptrend in precious metals. Technical breakouts appear to be forming similar to early 2009.

Royalty Companies Leading Sector

The precious metal royalty companies are outperforming such as Royal Gold (NASDAQ:RGLD) and Franco Nevada (FNV), which are hitting new 52 week highs and were added to our select list in mid-August prior to the breakout. We believe we are on the verge of a new bull market after an 18 month correction and believe that we have ended the basing stage. We are getting ready for a major move higher and now is the time to get on board before the masses begin entering our sectors.
(Click to enlarge)

The royalty companies are leading some of the major miners such as Newmont (NYSE:NEM) and Barrick (NYSE:ABX). These breakouts ahead of their peers may be telling us that this royalty business model of paying cash in return for a stream of production is very advantageous for shareholders as it limits downside risk and is able to provide potential leverage or rising precious metal prices. Sandstorm (NYSEMKT:SAND) recently listed on the NYSE, which was very well received by investors. It gapped up to a new 52 week high. Sandstorm is run by the former CFO of Silver Wheaton (NYSE:SLW), which has become the major silver royalty company.

Major Deals Taking Place Indicates Potential Bottom

Silver Wheaton recently made a royalty deal with Hudbay Minerals (NYSE:HBM) in early August. This is the first major deal in several years for Silver Wheaton and may be forecasting a potential turnaround in the sector as these royalty companies who are flush with cash infuse the juniors with cash to move ahead with development. The royalty companies during this correction have held up well showing less volatility than the actual miners. They may outperform to the upside as the royalty companies break into new highs ahead of the major producers.

Disclosure: I am long FNV, RGLD, SAND, GLD, SLV, GDX, SLW. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.