Osisko Gold Royalties: Set To Prosper From Gold Appreciation

The company does have some debt, but their cash and investments in miners are available to pay it off if needed. Overall, the balance sheet is moderately strong, and represents a mildly leveraged play on gold appreciation and stream/royalty growth.

The Case for Gold Appreciation

Gold is a difficult commodity to determine a value for, but there are two key charts worth highlighting.

Chart 1) Interest Rate Expectations

As this article describes, gold often bottoms (and thus starts a nice bull run) when interest rates set by the Federal Reserve hit a peak.

Right now, the market expects that we’ve basically just hit peak interest rates for this market cycle.

(Click on image to enlarge)

Interest Rates

Source: JP Morgan Guide to the Markets, 1Q2019

The reason interest rates affect gold has to do with opportunity cost. If banks pay you a high inflation-adjusted interest rate to hold your money in the bank, it makes sense to sell gold and hold cash for the interest. However, when banks pay low or negative inflation-adjusted interest rates, many investors believe it makes sense to store their wealth in gold instead.

Cash in a bank is actually the bank’s liability. Although it’s backed up by federal insurance, cash is tied to the bank’s 10-to-1 leverage ratio and vulnerable to money-printing and devaluation. There’s less of an incentive to hold it over gold when it doesn’t pay you anything.

Therefore, when Federal Reserve interest rates hit a peak and eventually go down, that’s often bullish for gold.

Chart 2) Gold Price to Monetary Base

Central banks keep printing more money, and that monetary base grows a lot faster than gold.

This chart shows the ratio of the price of gold to the adjusted monetary base of the United States:

Gold to Money Base Chart

Chart Source: Macrotrends

During 2001, which preceded a massive decade-long bull market in gold, the ratio was 0.41. It then spiked to a peak of over 1. After that, trillions of dollars of quantitative easing by the Federal Reserve drastically increased the monetary base, and the ratio to gold hit an all-time low of 0.26 in late 2015.

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Disclosure: The author is long gold, OR, and FNV.

Disclaimer: Modest Money is designed to provide entertainment and information to investors and those who would like to learn about the ...

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