ChartWatch: A Different Kind of Gold Miner

It may surprise many investors to discover that gold miners are one of the worst performing groups this year.

The Market Vectors Gold Miners (NYSE: GDX) is down 15%, while Market Vectors Junior Gold Miners ETF (NYSE: GDXJ) is down 19.5% so far in 2012.

Though gold prices have been sideways, gold miners declined because costs to uncover new gold increased. This increase slowed net income growth, which negatively affected equity valuations.

In a previous ChartWatch article, I mentioned that Royal Gold (NASDAQ: RGLD) is my favorite gold miner because they don’t mine. That’s because it’s a royalty trust.

Instead of actively drilling for new gold, royalty trusts provide capital, land or both to smaller gold miners in exchange for a fixed share of future gold production. Royalty trusts give investors the benefits of gold miners without the headaches of operational volatility.

In the same article, I mentioned that RGLD shares were likely to be contained at the $83 level (blue line below) and dip to $74.50 in August. That pullback arrived, which is why I believe now is a great time to enter (or add to) a position in Royal Gold.

Though the shares dropped further than expected ($72), sellers appear weak. And despite a recent article published on the potential for a major decline in gold, no confirmation of that bearish trend has occurred.

However, even if the price of gold declines (or moves sideways), Royal Gold will be unblemished. As a royalty trust, the price of gold has a minimal impact on net income.

Of course, an increase in gold prices would result in increased gold drilling activity. Because RGLD finances new drilling projects, an increase in gold prices should boost its business.



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