Gold is the one currency humans can’t print or produce, which makes it a great protective layer to your investment capital during periods of hyperinflation. But, how do you actually invest in gold? Are you supposed to keep gold bars in a safe at home? To discuss all your options and how to weigh all the risks according to your own portfolio, David Garofalo joins Josh on Making Bank to share his expertise.
David has worked in various leadership capacities in the natural resource sector for over 30 years. He has served as CEO and President and Chairman of the Gold Royalty Corporation, and has also served as President and CEO of Goldcorp until its sale to Newmont Corporation in 2019. Prior to joining Goldcorp, he served as President and CEO and Director of Hudbay Minerals from 2010-2015, where he presided over the company’s emergence as a leading metals producer.
During his interview on the Making Bank podcast, David shares with listeners the importance of having liquid assets in the gold and precious metals space, and provides clear, actionable tips to getting started in investing in gold and metals royalties. He details the current state of today’s “hyperinflationary” environment, and how diversifying your portfolio with gold royalties can protect and preserve your capital during such a time.
Gold is a Currency, Not a Commodity
David explains, “Currencies trade relative to each other based on interest rate differentials.” He says owning capital in treasury bills is a “good way to see your capital destroyed by inflation over time,” because of the lack of yield. Such a cycle continues to drive capital towards gold.
Believe it or not, there’s a very finite amount of gold on the earth’s surface. David tells us there’s only been 200,000 metric tons mined of gold to date, which can be visualized as four Olympic-sized swimming pools.
Every year, only another 4,000 metric tons is mined, increasing the supply by just 5% per annum. And it doesn’t have the elasticity of supplier price, so even with higher gold prices, the industry’s supply is not being stimulated. David says the industry is actually seeing mine supply decrease because the industry has been under-invested in exploration and development for the last six years or so.
How to Invest in Gold and Precious Metals
David shares three different options at different points along the risk spectrum for investors looking to diversify their portfolio with gold and precious metals.
The easiest, lowest-risk way to play the gold or silver sectors would be to take out physical capital in real gold or silver bars, or by buying through an ETF that is physically backed by gold and silver on the other end.
The next option a bit further down the risk spectrum would be to look into gold royalty companies, that provide you leverage to the gold price as well as exploration upside. David admits the additional risk involved with gold royalties, but ultimately believes the risk is justified and gold royalties “are the best of both worlds,” because the royalties allow you leverage to the price as well as physical exposure.
Regardless of the avenue you choose for your precious metal investing, David advises that you allocate your capital in such a way so that gold and metals make up 10-20% of your total portfolio. Doing so provides your capital a healthy safety net during times of hyperinflation and volatility.
Benefits of Having Gold Royalties
The gold royalty model works by providing capital to mine developers and operators to expand their exploration and productivity, and then takes the royalties back to return a fixed percentage of the revenue, which David says typically runs between 1-3%.
David explains that gold royalties enjoy the exploration upside when operators find more gold in the ground, for example, but are protected from inflation impacts on the cost of operation. Even if costs inflate, the gold royalty revenue float is unaffected. “We’re taking top-line risk only,” David says. As an investor, this means you enjoy the benefits of good days in the mine through a healthy exploration upside, without worrying about operation cost inflation.
David’s royalty company, Gold Royalty Corp (GROY), launched out of Vancouver in June, 2020. Check out the company website for more information and how you can get started investing in gold and precious metals via royalties.
As with any investment venture, it’s important to thoroughly research where you’re putting your money. David says you want to make sure that you’re investing in gold equities that are in “stable jurisdictions with stable cost structures,” and research and industry experts can help give you that peace of mind.