Royal Gold Strikes It Rich With Shrewd Bets

Everyone knows the myth about Midas, whose greed for gold became his downfall. Perhaps if he had found a way to make money from gold without owning it, his story would have had a happy ending.

If Midas were a modern-day investor, he would be wise to put his money in Royal Gold (RGLD Quote), which profits from royalties on precious metals.

Royal Gold leaves metal exploration and management to mining companies. The company pays mine operators upfront and collects a percentage of the metal produced. It's shielded from the operational costs, making it a lower-risk investment than mining stocks.

During recessions, investors consider gold and silver safe havens and a way to hedge against inflation. As governments around the globe inject capital into their economies, inflationary concerns will likely mount and the prices of precious metals will climb.

Gold prices have risen 73% in the past two years, and we expect that trend to continue in 2009. Economists and commodity analysts predict gold will top $1,500 an ounce this year. Silver will likely follow the same trajectory.

Royal Gold is benefiting from that optimism, which has lifted its shares 51% during the past year and 31% in the past six months. The stock is trading at an industry-relative premium based on price to earnings, price to sales, and price to cash flow.

While the Denver-based company's revenue declined slightly to $14.6 million in the most recent quarter, its net income quadrupled. Its gross margin widened to 95.81% from 93.91%.