The fear trade might be on again
During extended phases of doubt or outright fear, many investors have historically turned to the established security of precious metals. Commanding universal intrinsic value, this special category within the broad commodities sector provides some reassurances of wealth protection. However, carrying around physical metals can be a drag, literally and metaphorically. Therefore, interest could spike regarding gold stocks to buy.
While investors pivoting toward a defensive posture this year may want to consider a modicum of funds directed toward physical metals — after all, if you don’t hold it, you don’t truly own it — gold stocks offer multiple advantages over just the underlying asset. For one thing, it’s quite difficult to steal equity shares, with multiple protections in place. Second, mining firms tend to offer greater returns than just the asset itself.
To be fair, though, gold stocks usually make sense during periods of inflation. Of course, such circumstances invite investors to protect their purchasing power. On paper, a deflationary circumstance would be negative for precious metals as the U.S. dollar would rise in relative strength. Nevertheless, gold may still offer longer-term positive returns based on multiple uncertainties lying over the horizon.
Moreover, the Federal Reserve has signaled a pivot in monetary policy, moving from a dovish, accommodating strategy to one that’s much more hawkish. In turn, this move will likely raise borrowing costs, disincentivizing risk-on assets including gold stocks. However, you should know that no guarantee exists that the hawkishness will be indefinite, particularly because money velocity is near all-time recorded lows.
Defined as the rate at which each unit of currency circulates throughout the economy, an ultra-low money velocity suggests consumers have little confidence in the recovery initiative. Therefore, we could be back toward a dovish policy again, which would bode well for these gold stocks.
- Newmont (NYSE:NEM)
- Barrick Gold (NYSE:GOLD)
- Royal Gold (NASDAQ:RGLD)
- Wheaton Precious Metals (NYSE:WPM)
- Franco-Nevada (NYSE:FNV)
- Sibanye Stillwater (NYSE:SBSW)
- Aurelia Metals (OTCMKTS:AUMTF)
During a market panic, virtually all sectors are at severe risk of plummeting, including gold stocks. Therefore, due diligence and strict money management are a must in this arena. At the same time, simmering geopolitical conflicts remind us that problems aren’t just exclusive to home. Thus, at least necessitating a closer look at alternative investments.
Gold Stocks: Newmont (NEM)
When you first start building your portfolio of gold stocks, you want to start with some of the established firms. While this sector presents significant opportunities, particularly during periods of uncertainty and turmoil, it can also get incredibly volatile. That’s the case with junior miners, which are largely aspirational at best.
However, Newmont is about as far as you can get from an exclusively exploration-focused company. Instead, according to its website, Newmont “has the largest gold reserve base in the industry” underpinned by its “world-class ore bodies in top tier jurisdictions.” At the time of writing, NEM stock commanded a market capitalization of $47.7 billion.
Back in early 2020, Newmont achieved a significant milestone, reporting gold reserves of over 100 million ounces — the largest mineral reserves in the industry. Just as well, the company provides a best-of-both-worlds investment, with NEM stock playing into the fear trade while also offering an attractive 3.53% dividend yield.
For comparison, the materials industry’s average yield is 2.82%, giving NEM stock a significant lead over other gold stocks. Furthermore, such a strong yield is obviously much better than the 0% you get holding physical precious metals.
Barrick Gold (GOLD)
Another one of the top gold stocks to buy, Barrick Gold features a market cap of $34.6 billion. While frequently ranking below Newmont in the valuation race, Barrick has ambitious goals, striving to be the world’s most valuable gold miner. To accomplish this objective, Barrick is focusing on what it terms tier one mining assets.
The company defines tier one as the ability to produce half a million ounces of gold annually while facilitating at least 10 years of productive life and enjoying low-cost operations on a total costs-per-ounce basis. If Barrick accomplishes this objective, it will be able to generate not only revenue but revenue predictability. That alone could be worth a pretty premium in this typically volatile segment.
Management anticipates that it will produce an average of 5 million ounces annually through 2030. To be fair, the financials for Barrick has been slowing down recently, a circumstance that’s no different from other gold stocks. For instance, in the third quarter of 2021, its revenue haul of $2.8 billion was about 25% off from the year-ago level of $3.5 billion.
Still, on a multi-year basis, GOLD stock’s chart appears to be setting up for a bullish swing higher. Therefore, it’s certainly one to keep on the radar.
Gold Stocks: Royal Gold (RGLD)
Fundamentally, one of the biggest risks with gold stocks is the threat of the unknown. Basically, if a miner doesn’t produce the target commodity, it’s going to be run out of town. Of course, this risk is most prevalent in junior mining firms, which are focused on the exploration side of the business. If no discovery is made, then the company will likely go bankrupt.
Still, it’s an inherent risk for all gold stocks, which is why investors should consider diversifying into names like Royal Gold. Structured as a royalty firm, Royal Gold focuses on “building and managing a diversified, cash-flowing portfolio of precious metal assets, while also accumulating a pipeline of earlier stage assets that are not yet cash-flowing, but have the potential to do so in the future.”
Gold stocks tied to royalty models benefit from revenue predictability. By definition, a royalty is a “non-operating interest in a mining project that provides the right to a percentage of revenue or metal produced from the project after deducting specified costs, if any.”
Combine that with Royal Gold’s yield of 1.3%, and you have a well-rounded investment that can help mitigate shocks historically associated with gold stocks.
Wheaton Precious Metals (WPM)
As a result, Wheaton is able to deliver higher margins for its stakeholders. Thanks to a combo of strong cash flows and commodity price leverage, WPM stock has consistently outperformed its underlying gold and silver assets — along with precious metal exchange-traded funds and several other gold stocks. While the narrative comes from its marketing pitch, the reality is that WPM stock has generated surprisingly strong returns, even without directly operating a mining project.Similar to Royal Gold above, Wheaton Precious Metals also features a non-operating interest in the metals mining industry. Therefore, Wheaton manages to deliver predictability for shareholders, many of whom may not have the experience deciphering which mining firm is viable and which should be left on the sidelines.
However, the manner in which Wheaton conducts business is different from Royal Gold in that the former is a streaming firm. Rather than a right to a percentage of revenue or metals produced, streaming firms sign a contractual right to purchase all or a portion of metals produced from a mine.
Furthermore, Wheaton features a 1.45% yield. True, it’s not the most generous yield you can get. However, with the potential for upside gains from the fear trade, it’s an attractive add-on benefit.
Gold Stocks: Franco-Nevada (FNV)
Featuring both royalty and streaming business models, Franco-Nevada in some ways could be the investment to consider if you can’t choose between the above two gold stocks. Based in Canada, Franco-Nevada features a diversified portfolio, with agreements connected to gold, silver and the platinum group metals of platinum and palladium.
If that wasn’t enough, Franco-Nevada is also mixed in with iron ore and oil and gas contracts. Certainly, if you want to cast a wide net with your gold stocks, this is the one to put on your radar.
As mentioned previously, the advantages of royalty and streaming allow for better predictability and thus lower risk. With key business items contractually documented, Franco-Nevada buffers itself from cost overflows that have been the bane for gold stocks. However, my particular interest in FNV stock is its ties to palladium.
First, while palladium may not be as critical for electric vehicles (EVs), they play a vital role in emissions management. As you probably heard, criminals are stealing vehicles’ catalytic converters not for the piping work but for the integrated palladium.
Second, tensions with Russia will likely support rising prices since the country is the biggest producer of the metal. It’s cynical, yes, but FNV stock could enjoy significant upside.
Sibanye Stillwater (SBSW)
Billed as the “world’s largest primary producer of platinum, second largest primary producer of palladium and third largest producer of gold,” Sibanye Stillwater may play a substantial role in world affairs in the years ahead. Just as I mentioned above, palladium is a crucial metal, not just for emissions control but multiple other technology-centric applications.
While it could be the metal of the future, Russia commands the greatest influence over its supply. Therefore, Sibanye Stillwater, which is headquartered in South Africa, provides a much more palatable diplomatic access point.
To be fair, some might dismiss the future utility of palladium due to EVs not needing emissions controls. However, EVs still only make up a small percentage of vehicles on the road. As well, the global economic disruption that occurred because of the coronavirus pandemic makes EV ownership out of reach for average-income households.
Finally, people have been forced to buy cars at a premium during the new normal. They’re going to need to hold onto their rides for a longer-than-usual period for the purchase to make financial sense. This may translate to greater repair work, including the repair or replacement of palladium-integrated catalytic converters.
Gold Stocks: Aurelia Metals (AUMTF)
Because gold stocks tend to be riskier than other asset classes, I’ve focused on the safer wagers in this segment. Still, “safer” is a relative term in this business.
Therefore, if you must conduct intense due diligence with long-established gold stocks, believe me, you’ll want to go through the details of Aurelia Metals with an electron microscope. However, given that this is the age of investment memes, I suppose it would be rude of me not to mention the speculative side of this industry.
Just let me clarify this one more time: if you acquire AUMTF stock, you did so because you made the choice. I didn’t say jack squat.
Now, per its website, Aurelia is an “Australian mining and exploration company with a highly strategic landholding and three operating gold mines in New South Wales.” That said, whether this exploratory endeavor pans out is anybody’s guess.
However, Sprott Junior Gold Miners ETF (exchange-traded fund) has Aurelia at the top of its holdings with a 5.53% weighting. One of the most powerful names in the precious metals sector, Sprott Asset Management acts as the investment advisor to the ETF, if that kind of stuff provides you confidence. It’s no guarantee of upside but it does offer some food for thought.
This article originally appeared at InvestorPlace.
On the date of publication, Josh Enomoto held a LONG position in the precious metals mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare.