Infographic: Gold and Silver Dealer Hedging
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Gold and Silver Dealer Hedging

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Gold and Silver Dealer Hedging

Gold and Silver Dealer Hedging

Gold, silver, and platinum prices have been known to fluctuate significantly. Just last year, for example, the gold price dropped $110 in just one day (April 15th). Later on in 2014, the typically more volatile silver jumped 17% from its intraday lows in the course of a day (Dec 1st).

The largest precious metals dealers buy and sell millions of ounces of bullion each month, which means they have to be careful that they are not on the wrong side of one of these big price swings. Large price movements, both up and down, can potentially wipe out or endanger smaller dealers that aren’t careful with their inventory.

Over time, bullion dealers have developed a way to hedge against these market risks, to make business safer and more predictable for both them and their customers.

What is Hedging?

Hedging is the process of playing both sides of a market to provide protection against the market’s fluctuations.

For bullion dealers, hedging means that the dealer has to offset all of their long positions with short positions, and vice versa. By ensuring they never have a long or short overall position in the market, the dealer ensures they are immune to market movements, and lock in their margins between their purchase premiums and sale premiums.

Long positions: Any inventory the bullion dealer holds or has priced/ordered from a supplier. The dealer benefits from upwards price movement in the gold or silver price.

Short positions: Any orders that the bullion dealer has yet to fulfill. The dealer benefits from downwards price movement in the gold or silver price.

Net house position: Equal to the bullion dealer’s long position minus short position.

A Sample Situation

A gold dealer holds 5,000 ounces of physical inventory bought at a spot price of $1,200/oz plus wholesale premium. The dealer has 3,000 ounces worth of open customer orders, sold at a spot price of $1,200/oz plus retail premium. This leaves the dealer with a net long position of 2,000 ounces bought at $1,200/oz spot.

With no hedging, the dealer has a net long house position of 2,000 oz.

With hedging, the dealer offsets this position by shorting 20 gold futures contracts for 100 oz gold each, for a total short of 2,000 oz.

If the price of gold swings $200, it will have an unanticipated $400,000 positive or negative effect on the dealer who does not hedge. For the dealer that hedges the net long position with short futures contracts, everything will be a wash. This allows the dealer to not have to worry about swings, and instead to focus on making margin on premiums alone.

A Sample Situation

Since markets are not open on weekends, online dealers typically estimate their weekend sales and take an offsetting long position into the closing bell on Friday, with the hopes of selling exactly that much metal between closing Friday and opening Sunday evening.

Some larger wholesalers will make weekend markets with widened spreads to allow dealers to buy or sell metal on the weekend as needed. The market maker in this scenario takes additional price exposure into the Sunday open, in exchange for the widened spreads throughout the weekend.

To Hedge or Not to Hedge

Dealers hedge to ensure that even if spot plunges very quickly, they are still financially stable and secure.

Dealers that do not hedge, or are not big enough to trade futures contracts, run the risk of being wiped out by big and unanticipated market movements.

Hedging large bullion inventories is not the norm for all silver and gold retailers. Many local coin dealers and even online sellers do not fully hedge their positions.

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Gold

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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