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After a Fitful 2021, Is It Finally Time For Gold Stocks to Shine?

Barchart - Thu Mar 10, 2022

For years, gold has been seen as a store of value that becomes more valuable when inflation rises. But in 2021, despite rising inflation in the United States, gold didn’t do much to merit its hedge against inflation status. However, the Russian invasion of Ukraine is creating a more bullish outlook. 

The yellow metal’s price is up about 8% in the 30 days ending March 1, 2022 - breaking above $1,900. Since then, gold has been met with some resistance. But if the conflict between Russia and Ukraine continues to escalate gold has a chance to move significantly higher. And that is corresponding to rising demand for physical gold.

However, while it’s natural to focus on gold’s ceiling, it can be more instructive to look at its floor. This is what I mean. In August 2021, the S&P 500 was up over 32% for the year. Gold, by contrast, was down a little over 8%. That’s not surprising because the price of equities and gold typically have an inverse relationship. But in 2022, the S&P 500 is down about 10% while gold is up 8%. That’s almost a one-to-one correlation. 

The takeaway is that the floor for gold is rising. But investing in physical gold and other precious metals isn’t for everybody. And that’s why it may be a good time to look at mining stocks. The gold mining market is expected to grow at a compound annual growth rate (CAGR) of 3.1% through 2026.

And as you’ll see, gold mining stocks have been growing at a faster rate than physical gold. For example, the VanEck Gold Miners ETF (GDX) is up 14% for the year. 

Plus, in many cases, investing in mining stocks allows an investor to benefit from the compounding effect of dividends. Here are three gold mining stocks that look like good buys for 2022. 

Barrick Gold (GOLD) - Barrick Gold is one of the largest miners in the world. That is being reflected in the stock price of GOLD which is up 26% for the year. A significant percentage of that gain occurring since the Russian invasion. When Barrick reported earnings in mid-February, it highlighted its portfolio of mines on several continents, significant free cash flow, and a bullish production outlook for 2022. 

Barrick has also recently announced plans to expand its copper business which already accounts for approximately 20% of the company’s profits. The stock’s P/E ratio of approximately 20.5 puts it below its historical midpoint. And investors also get a dividend with a 1.6% yield. 

Newmont Corporation (NEM) - Newmont gives investors exposure to the leading gold miner in the world. NEM stock is up 12% for the year which means its currently underperforming the GDX ETF. However, the rise in gold prices is likely to be a tide that rises all boats which means that NEM stock will head higher. 

The company reported earnings in late February and has already received several price target upgrades from analysts. That trend is likely to continue which will be bullish for the stock. Investors also get an attractive dividend with a yield of 3.19%.

Royal Gold (RGLD) - Royal Gold is a picks-and-shovels play on mining stocks. That is to say that Royal Gold doesn’t engage in mining activities themselves. Rather, they acquire and manage mining companies. In many cases, the company invests in companies that have proven revenue and profits. In other cases, it invests in companies that are still in the exploratory stage. 

Mining activity becomes more profitable as prices rise. And that’s one reason that RGLD stock is up over 23% for the year. The stock is trading near the top of its 52-week range and has not gotten much attention from analysts since reporting earnings in February. However, the company does offer investors a dependable dividend that has increased in each of the last 21 years and has averaged 6% growth over the last three years. 

What Risks For Gold Remain?

While gold took an early lead in the race for risk-off assets, cryptocurrencies are starting to catch up. What looked like a “crypto winter” is starting to sprout green shoots. Bitcoin (BTCUSD) and Ethereum (ETHUSD) found support at prior levels and are now starting to move higher. This is likely to accelerate because cryptocurrencies are decentralized. This means that they don’t require mainstream financial vehicles such as the SWIFT network to be exchanged. 

Throwing a wrench into both gold and cryptocurrency could be the strengthening of the U.S. dollar. Historically, a stronger dollar leads to a weakness in gold prices. As the dollar weakened amidst economic stimulus and surging budget deficits, investors followed the slogan “cash is trash.” 

However, that may get a challenge as investors find safety in the relative security of the greenback. The dollar has risen against most major currencies since the imposition of sanctions on Russia. And although the amount and speed of upcoming interest rate hikes may be lower and slower, any rise in interest rates will be bullish for the dollar.

Provided Content: Content provided by Barchart. The Globe and Mail was not involved, and material was not reviewed prior to publication.