There’s still plenty of upside ahead for gold.
Since 2020, gold has made two attempts to break above its peak around $2,000. Both times, gold failed and fell apart. However, with recession likely, a potential cooldown with interest rate hikes, a weaker dollar, and big demand, gold could soon break to new highs.
For one, central banks are buying gold like it’s 1967 all over again. “Collectively they purchased 1,136 metric tons of the metal worth more than $70 billion in 2022. It was also the biggest level of purchasing since 1967, more than half a century ago, according to data provided by industry group World Gold Council,” noted Forbes.com.
Two, the annual rate of US inflation just fell again to 6.5% in December from 7.1%, increasing bets the Federal Reserve could cool it with aggressive rate hikes. In fact, if we see a Fed policy pivot, gold prices could push aggressively higher. Three, further talk of recession should provide further support for gold, while weakening the U.S. dollar.
In addition, according to Kitco.com,
Capital Economics sees the Fed cutting rates in the second half of 2023. “Although the economy appears to have held up in the fourth quarter … a recession is on the way, which will help to reduce inflationary pressures further. The upshot is that, despite the Fed’s continued hawkishness, we still expect interest rates to be falling again by late 2023,” said Capital Economics chief North America economist Paul Ashworth.
Of course, there’s also geopolitical uncertainty, too. Should we see a black swan event with Russia, China, or even North Korea, gold prices could pop.
That being said, investors may want to buy into undervalued gold stocks such as:
Barrick Gold (GOLD)
Barrick Gold is one of the biggest companies in the gold industry.
Operating mines and projects in 18 countries in North and South America, Africa, Papua New Guinea and Saudi Arabia, its portfolio spans the world’s most prolific gold districts in the world.
The company, which expects to produce about 4.5 million ounces of gold per year through 2030, is also maintaining its 2.82% dividend yield.
Better, the company has an attractive asset base with about 69 million ounces in proven and probable reserves. Also, GOLD just reported preliminary production results for the full year and fourth quarter of 2022. The company’s Q4 gold production was 13% higher than the previous quarter, resulting in preliminary gold production for the full year of 4.14 million ounces.
Analysts seem to like the GOLD stock, too. Barclays, for example, just raised its price target on the stock to $26 from $23. “While economic growth has remained better than expected, gold is a good hedge against further deterioration in the outlook, says the analyst, who continues to prefer gold over copper equities.” UBS analysts also reiterated a buy rating on the stock, with a price target of $24.
VanEck Vectors Gold Miners ETF (GDX)
Next up, the VanEck Vectors Gold Miners ETF (GDX) is attractive.
One of the best ways to diversify at less cost is with an ETF, such as the VanEck Vectors Gold Miners ETF (GDX). Not only can you gain access to some of the biggest gold stocks in the world, you can do so at less cost. With an expense ratio of 0.51%, the ETF holds positions in Newmont Corp., Barrick Gold, Franco-Nevada, Agnico Eagle Mines, Gold Fields, and Wheaton Precious Metals to name a few.
Even better, shares of mining stocks can often outperform the price of gold.
That’s because higher gold prices can result in increased profit margins and free cash flow for gold miners. In addition, top gold miners often have limited exposure to riskier mining projects.
Also, according to Capital.com:
“Gold miners have traditionally outperformed bullion in bullish markets, due to the way these companies use their operating leverage in order to increase profits, which leads to a boost in share prices. Thus, this is largely due to profit expansion, as miners are able to sell appreciating gold fairly quickly, thus avoiding a decline in prices, whereas their own operational costs rise much more slowly.”
“When gold surged between 2000-2011, the metal itself provided a rise of 550%; however, gold mining equities on the NYSE Arca Gold Miners Index jumped 690%. Since 2015, gold has seen an upswing of about 78% – far outstripped by gold mining stocks, with a surge of about 182%.”
Newmont Corporation (NEM)
Operating mines and projects in 9 countries in North and South America, Africa, and Australia, its portfolio spans the world’s top gold districts in the world. The company, which expects to produce about 8 million gold equivalent ounces per year for the next decade.
Even better, with a dividend yield of 4.17%, Newmont Corporation is another one of the industry’s largest gold companies, with 96 million ounces of gold reserves.
It’s also too cheap to ignore.
In fact, as noted by Goldman Sachs analyst Emily Chieng, as quoted by Barron’s, “Recent underperformance marks an attractive entry point for a low-risk gold producer delivering volume growth.” Better, Barclays analyst Matthew Murphy raised the firm’s price target on Newmont to $57 from $54, with an Equal Weight rating.
In its recent quarter, “Newmont delivered solid third quarter production of 1.5 million gold ounces as we build momentum for strong production in the fourth quarter. Newmont remains well-positioned to respond to the challenging market environment that our industry faces today. We continue to leverage our leadership and collective experience, as well as the strength of our global portfolio with the size and scale to build a resilient and sustainable future.”
Sprott Junior Gold Miners ETF (SGDJ)
With an expense ratio of 0.35%, the SGDJ ETF seeks investment results that correspond (before fees and expenses) generally to the performance of its underlying index, the Solactive Junior Gold Miners Custom Factors Index. The Index aims to track the performance of small-cap gold companies whose stocks are listed on regulated exchanges.
The ETF also carries a dividend yield of 2.1%.
Some of its top holdings include Lundin Gold Inc., Seabridge Gold, Equinox Gold, Victoria Gold, Westgold Resources, Osisko Mining, K92 Mining Inc., Novagold Resources, Regis Resources, New Gold Inc., Sabina Gold & Silver, Argonaut Gold, Centerra Gold, Coeur Mining, Skeena Resources, and K92 Mining to name a few.
Even better, the portfolio, which holds 43 stocks, is rebalanced semi-annually, ensuring that it reacts to opportunities in time. In short, for investors looking ahead, a small-cap gold miner ETF like SGDJ could be a solid opportunity.
With a dividend yield of 0.94%, Franco-Nevada operates as a gold-focused royalty and streaming company in Latin America, the United States, Canada, and internationally.
Most recently, the company hiked its dividend by 6.3% to $0.34 per share, or $1.36 annualized, for an annual yield of 0.9%. The dividend will be payable on March 30, 2023, to stockholders of record on March 16, 2023.
Better, we have to consider that royalty and streaming firms tend to be more stable than mining companies, which is why this stock is among the best to own now. Barclays also likes Franco-Nevada, raising its price target to $115 from $111, with an Underweight rating.
Also, as the company reported late last year, “Franco-Nevada has record GEOs, revenue, net income, Adjusted Net Income and Adjusted EBITDA for the three quarters through September 30, 2022 and is on-track to meet full year guidance. The weaker gold price environment has led to an increase in demand for royalty and stream financing. We are pleased to have acquired a royalty on Argonaut’s Magino project in Ontario that is currently under construction and our business development group remains very active.”