Things to Know About Gold

4 key takeaways on natural resources...

I RECENTLY attended the annual Rick Rule resource conference in Boca Raton, Florida, writes Byron King in Addison Wiggin's Daily Reckoning.

Who doesn't want to swelter in 95-degree temps in the shade and 95% humidity? Then again, and as an old friend – a rompin', stompin' retired Navy SEAL – says, "There's no bad weather, only inappropriate clothing and poor preparation."

No need to fret, though. It was all okay because the heat and humidity were outside, while we were inside a superb venue with excellent air conditioning and many other great amenities. And c'mon; hot weather or no, I was there to learn, and learn I did. Because Rick puts on one of the best resource-focused conferences you'll find anywhere.

This recent event was four solid days of deep dives into junior and intermediate-scale resource companies, particularly gold and silver, royalty ideas and the fast-evolving world of copper.

Let's look at four key takeaways.

Day One began with an insightful talk about gold by Dana Samuelson, president of the American Gold Exchange of Austin, Texas. He runs a sizable operation, and when you sell hundreds of millions of Dollars in gold and silver coins and bullion, you tend to know things.

First, per Dana, "beware of fake gold." That is, Dana is a certified numismatist who has served for many years as an expert witness in litigation over quality and purity disputes, as well as for the US government in fraud and other criminal prosecutions.

Dana's point was that with rising gold prices, the market has attracted fraudsters. Incidents are rising of coins and metal bars that are not what they purport to be. With ingots and even some coins, gold and silver may be alloyed down in purity.

You can only tell with sensitive measuring techniques. In extreme cases, a so-called "gold" bar may be nothing more than a gold veneer over a mass of far less valuable tungsten. And more than a few coins for sale on websites may also be counterfeit, even ones inside those impressive-looking plastic slabs.

This is not a reason not to buy physical coins and ingots, etc. But it is a caution to be careful and judicious with whom you deal. Dana's advice is to buy from established, reputable dealers. You should ask about the background of the people on staff, particularly what's their expertise in the field, as well as what testing equipment and method they utilize to ensure the fineness of the metal offered for sale.

And one final point: If or when the time comes to sell a coin or metal ingot, it helps to go to the dealer from whom you bought it in the first place. Good dealers ought to be willing to buy back what they sold you, allowing for price changes.

And it's not hard to understand that many dealers don't want to buy products that they never carried or sold in the first place, like many specialty coins.

Dana also offered solid insights into the current worldwide demand for gold. In essence, central bank gold buying has soared in the past two years, while investment demand for gold from Asia is way up as well.

As for central banks, the historical trend is that about 15% of total annual global gold output from mines has gone into central bank vaults; but in the past two years, since mid-2022, that number has more than doubled.

In fact, right now about a third of the annual global gold mine output is being purchased by central banks. This alone is a major change in the supply-demand dynamics of the metal.

It's not hard to understand why central banks have increased their gold buying. It's directly traceable to Western sanctions on Russia over the Ukraine military operation which commenced in February 2022.

Shortly thereafter, the US and Western allies froze about $350 billion in Russian-owned US Treasury securities; that is, state assets of the Russian Federation. Another way to say it is that the US and Western partners confiscated Russian state funds, and this sent shock waves across the world.

If the US can freeze the assets of a nuclear power like Russia, what chance does anyone else have if politicians and bureaucrats in Washington decide to pull a money grab? The immediate and most effective means to protect assets is to de-Dollarize by selling off US Treasuries and use the proceeds to buy physical gold.

At least then central banks can control their own fate via hard assets and avoid counterparty risk. Meanwhile in Asia – mostly China, but many other nations as well – investors are buying more and more physical gold and silver.

The idea is to transfer funds out of depreciating local currencies, and at the same time avoid the traceability that comes with something like buying US Treasuries. Meanwhile, gold is a hedge against inflation both in local currency as well as with US Dollars.

Up and down the line, Asian gold buying is strong. Purchasers range from individual investors to family offices, banks, businesses and even governments, plus the above-noted central banks.

Right now, considering the current world situation, people and institutions in many places wish to avoid local currencies and even Dollars and accumulate an immutable asset with the capability to protect wealth across years and even generations. Hence the trend toward gold buying.

With rising gold prices, one part of the sector has done quite well, namely royalty companies. These are not mining plays, though; they're more like specialized bankers to the mining industry. And when gold prices rise, shares in royalty plays tend to move early and fast. Here's how it works.

Let's say that an exploration or development project is proceeding apace out in the field, but the company needs cash. Management can issue new shares, but that dilutes existing shareholders. And most commercial banks won't lend at decent terms to a project that isn't producing gold or cash flow.

So along come royalty companies with a business model designed to advance funds into a project in return for a future payout, or even a stream of actual metal, when the project goes into production. There's much geological thinking, engineering and solid banking involved in the business, and every deal is different.

But the idea is that the royalty company puts money into a project in the early days, and then benefits long afterward from its foresight and patience. One great advantage of the royalty model is that the company avoids most day-to-day issues of running a mine.

Royalty companies generally don't worry too much about the price of diesel fuel, or labor issues, or the logistics of operations or much more. They put their funds into play with the project operator, and then after a while collect a payout on the backend.

Anyway, it's a potentially lucrative option you might want to consider if you want exposure to the precious metals market.