Infographic: How Billionaire Investors Are Hedging Against Geopolitical Black Swans
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How Billionaire Investors Hedge Against Geopolitical Black Swans

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Investors must always be comfortable with the idea that the market bears risk.

Sometimes this risk flies under the radar and isn’t as pronounced as it probably should be.

However, in other cases, the topic of risk can catapult to the forefront of discussion. There can be specific events or signals unfolding that give investors the jitters – and during these times, investors will make adjustments to their portfolios to avoid getting caught off guard.

How Billionaires are Hedging

In the following infographic from Sprott Physical Bullion Trusts, we explain the particular geopolitical risks that have the world’s most elite investors concerned today – and what moves they are making to protect themselves from black swans.

How Billionaire Investors are Hedging Against Geopolitical Black Swans

The world isn’t predictable at the best of times – but after unanticipated occurrences such as Brexit and the election of Trump in 2016, the geopolitical tea leaves are getting even more difficult to read.

The world is approaching a major inflection point and the intense amount of global angst we’re experiencing now stems from deep, structural forces that have been building over decades.

– Reva Goujon, VP Global Analysis of Stratfor

According to Reva Goujon, VP Global Analysis of Stratfor, we are experiencing the perfect storm of “-isms”: nationalism, nativism, protectionism, and isolationism.

As a result, the following potential geopolitical risks are at the top of the agenda for experts and top investors:

Domestic risks:
Unpredictability of the Trump administration, government inaction, a trade war with China, and NAFTA renegotiations

International risks:
Economic nationalism, further “exits” from the EU, Russia and China seeking to assert authority, terrorism, escalation of Middle East conflicts, and North Korea’s nuclear ambitions

Elite Investors Taking Action

With these risks perceived to be on the table, some of the world’s most elite investors like Ray Dalio and Warren Buffett are taking action. Here’s what they are up to:

Ray Dalio
Ray Dalio, the founder of the world’s largest hedge fund, Bridgewater Associates, had this to say:

When it comes to assessing political matters we are very humble.

-Ray Dalio, Aug 2017

Dalio’s advice: to stay liquid, stay diversified, and not be overly exposed to any particular economic outcomes. He also recommends a 5%-10% position in gold.

Warren Buffett
The Oracle of Omaha has a similar but very different perspective.

No one can tell you when these traumas will occur – not me, not Charlie, not economists, not the media.

– Warren Buffett, Feb 2017

With this in mind and with equities expensive, the seasoned value investor holds onto piles of cash to prepare for potential buying opportunities. Berkshire Hathaway now has $99.7 billion in undeployed cash, the most in the company’s history.

Bill Ackman

Billionaire hedge fund manager Bill Ackman took a position in “out of the money” call options on the VIX.

This will protect against stock market risk.

– Bill Ackman, Aug 2017

David Einhorn

The billionaire founder of Greenlight Capital says he is keeping gold as a top position.

The (Trump) administration comes with a high degree of uncertainty.

– David Einhorn, Feb 2017

Howard Marks

Lastly, the famous value investor Howard Marks warned his clients to move into lower-risk investments to protect against future losses.

The uncertainties are unusual in terms of number, scale and insolubility in areas including secular economic growth; the impact of central banks; interest rates and inflation; political dysfunction; geopolitical trouble spots; and the long-term impact of technology.

– Howard Marks, July 2017

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How Gold Royalties Outperform Gold and Mining Stocks

Gold royalty companies shield investors from inflation’s rising expenses, resulting in stronger returns than gold and gold mining companies.

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gold royalty company returns compared to gold and gold mining companies
The following content is sponsored by Gold Royalty
Infographic on gold royalty company returns

How Gold Royalties Outperform Gold and Mining Stocks

Gold and gold mining companies have long provided a diverse option for investors looking for gold-backed returns, however royalty companies have quietly been outperforming both.

While inflation’s recent surge has dampened profits for gold mining companies, royalty companies have remained immune thanks to their unique structure, offering stronger returns in both the short and long term.

After Part One of this series sponsored by Gold Royalty explained exactly how gold royalties avoid rising expenses caused by inflation, Part Two showcases the resulting stronger returns royalty companies can offer.

Comparing Returns

Since the pandemic lows in mid-March of 2020, gold royalty companies have greatly outperformed both gold and gold mining companies, shining especially bright in the past year’s highly inflationary environment.

While gold is up by 9% since the lows, gold mining companies are down by almost 3% over the same time period. On the other hand, gold royalty companies have offered an impressive 33% return for investors.

In the graphic above, you can see how gold royalty and gold mining company returns were closely matched during 2020, but when inflation rose in 2021, royalty companies held strong while mining company returns fell downwards.

 Returns since the pandemic lows
(Mid-March 2020)
Returns of the past four months
(July 8-November 8, 2022)
Gold Royalty Companies33.8%1.7%
Gold9.1%-1.7%
Gold Mining Companies-3.0%-8.6%

Even over the last four months as gold’s price fell by 1.7%, royalty companies managed to squeeze out a positive 1.7% return while gold mining companies dropped by 8.6%.

Gold Royalty Dividends Compared to Gold Mining Companies

Along with more resilient returns, gold royalty companies also offer significantly more stability than gold mining companies when it comes to dividend payouts.

Gold mining companies have highly volatile dividend payouts that are significantly adjusted depending on gold’s price. While this has provided high dividend payouts when gold’s price increases, it also results in huge dividend cuts when gold’s price falls as seen in the chart below.

chart of gold royalty company dividends vs gold mining company dividends

Rather than following gold’s price, royalty companies seek to provide growing stability with their dividend payouts, adjusting them so that shareholders are consistently rewarded.

Over the last 10 years, dividend-paying royalty companies have steadily increased their payouts, offering stability even when gold prices fall.

Why Gold Royalty Companies Outperform During Inflation

Gold has provided investors with the stability of a hard monetary asset for centuries, with mining companies offering a riskier high volatility bet on gold-backed cash flows. However, when gold prices fall or inflation increases operational costs, gold mining companies fall significantly more than the precious metal.

Gold royalty companies manage to avoid inflation’s bite or falling gold prices’ crunch on profit margins as they have no exposure to rising operational expenses like wages and energy fuels while also having a much smaller headcount and lower G&A expenses as a result.

Along with avoiding rising expenses, gold royalty companies still retain exposure to mine expansions and exploration, offering just as much upside as mining companies when projects grow.

Gold Royalty offers inflation-resistant gold exposure with a portfolio of royalties on top-tier mines across the Americas. Click here to find out more about Gold Royalty.

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How Gold Royalties Offer Inflation-Resistant Gold Exposure

As inflation has impacted gold mining company profits, this graphic explains how royalty companies offer inflation-resistant gold exposure.

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The following content is sponsored by Gold Royalty

How Gold Royalties Offer Inflation-Resistant Gold Exposure

As rising inflation has increased the operational expenses of gold mining companies, gold royalty companies have emerged as an inflation-resistant alternative for investors seeking exposure to the precious metal. 

Without exposure to rising wages, fuel, and energy costs, gold royalty companies are able to maintain strong profit margins that are often more than double those of gold mining companies.

This infographic sponsored by Gold Royalty is the first in a two-part series and showcases exactly how royalty companies naturally avoid inflation, along with the superior profit margins that come as a result.

Inflation’s Dampening Effect on Gold Mining Profits

Since mid-2021, inflation has become a constant risk-factor for investors to keep in mind as they manage their portfolio. Every energy fuel has risen in price over the last year alongside wage increases around the world, greatly impacting the expenses of material production and refining.

Gold mining is no exception, and while operational costs have risen, gold’s price has actually decreased slightly over the same time period, further impacting gold mines’ profitability and margins.

CommodityPrice change since the start of 2021
Coal+372%
Gasoline+72%
Diesel+53%
Electricity+24%
Gold-13%

The impact of inflation can’t be understated when it comes to mining operations, which require large amounts of machinery, electricity, and people.

Along with massive haul trucks, bulldozers, and machinery like large-scale grinding units that require diesel and other fuels to operate, refinery operations also consume large amounts of electricity.

How Gold Royalty Companies Avoid Inflation

With no large fleets of vehicles to fuel, refining plants to power, along with significantly smaller headcounts and wage bills, royalty companies barely suffer from rising inflation. Compared to gold mining companies with tens of thousands of employees across the world, gold royalty companies rarely employ more than 50 people. 

Along with this, while royalty companies’ revenue comes from royalty and streaming agreements with mining companies, these agreements are structured to ensure royalty companies face none of the operational expenses (and inflation) that miners do.

This is because royalty agreements calculate royalties (which royalty companies receive) as a percentage of the mine’s top-line revenue rather than from the mine’s final profits after expenses, meaning royalty companies get their cut before operational costs and other expenses are deducted.

The Golden Profit Margins of Royalty Companies

With gold’s price having remained stagnant while inflation has pushed expenses up, gold mining company profit margins have been crunched from both sides while royalty companies have avoided the impact. 

Over the last four quarters, gold mining giant Newmont Goldcorp’s average profit margin declined to 6.6% when compared to the 22.9% average margins of the four quarters prior. On the other hand, royalty company Franco-Nevada’s profit margins increased from 54.8% to 57.3% over the same time periods. 

Without inflation impacting their bottom line, royalty companies have been able to maintain strong financials in a chaotic period for the economy.

In part 2 of this series, we’ll take a closer look at the returns of gold royalty companies, and how exactly they’ve outperformed both gold mining companies and the precious metal itself.

Gold Royalty offers inflation-resistant gold exposure with a portfolio of royalties on top-tier mines across the Americas. Click here to find out more about Gold Royalty.

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