I’ve never been one to shy away from offering my opinion, even if I’m in the minority. And in my opinion, gold is a weird investment. As Warren Buffett says, “Gold gets dug out of the ground in Africa, or someplace. Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head.”
And he’s right. For the most part, there really is no utility to gold except for fear. When people are afraid of economic Armageddon, they rush into gold because it has historically been a store of value. Frankly, a store of value is only as good as the belief in its ability to store value; people believe gold stores value; thus gold has value.
Nevertheless, for those investors that are looking to gain exposure to the precious metal, my recommendation would be to pick up Wheaton Precious Metals Corp. (TSX: WPM)(NYSE: WPM). It’s formally known as Silver Wheaton Corp., but after gold became such a large part of its portfolio, it rebranded itself, so it was known as a general precious metals firm.
I’m an advocate for Wheaton Precious Metals over other gold miners because of its unique business model. Wheaton is a streamer, which means it agrees to buy the gold and silver found in a mine that is not built to find gold and silver.
Let’s say you want to open a copper mine and you want to get financing for it. You could go to the bank, but with commodity prices being so unpredictable, your rates are probably not going to be that great. Instead, you turn to Wheaton Precious Metals. They agree to buy all the gold and silver you find, helping to fund the copper mine. In exchange for being an investor in your company, Wheaton Precious Metals gets the gold and silver at a significant discount.
And that discount is deep. During the last quarter, Wheaton Precious Metals paid US$4.51 per ounce of silver and US$393 per ounce of gold. It then sold each ounce of silver for US$17.09 and each ounce of gold for US$1,263. Wheaton Precious Metals assumes the risk of investing in your copper mine, but if you find gold and silver, it benefits from very cheap rates, allowing it to keep its margins high.
Despite this, Wheaton was down year over year in the last quarter. Revenue dropped by 6%, and operating cash flow dropped to US$125 million. This is because Wheaton is dependent on high silver and gold prices. If they dip, Wheaton’s margins dip, thus cutting into revenue and cash flow.
So, investing in this company is effectively investing in the asset. Fellow Fool writer Jason Phillips believes that gold could be “range bound for the foreseeable future.” Said another way, the market is bullish, not bearish, so the primary use case — fear — just doesn’t factor in right now. But if that changes and the market gets scared, expect the spot price to rise, and with it, Wheaton Precious Metals Corp.
