With the spot price of gold reaching new all-time highs of over $1,900 per ounce, it’s safe to say that the gold and precious metals market is heating up. Traditionally, gold is considered as a safe-haven asset or a hedge against the U.S. dollar, low-interest rates, and inflation. This could be one of the big reasons why we are seeing gold prices rally, as the U.S. dollar has shown some weakness lately. As economic conditions remain uncertain, we’ve already witnessed the U.S. Dollar Index (DXY) fall 3.6% in July. Meanwhile, the price of gold is up 8.6% in July and the rally could just be getting started.
Creating a well-balanced portfolio means exploring all of the different investment vehicles that are available, and that includes precious metals. This is especially important when we face a lot of economic uncertainty and elevated stock market risk. There are several ways that you can gain exposure to the gold and precious metals market, but buying gold stocks is certainly one of the most straightforward. Below, we are going to walk you through 3 stocks that can help you capitalize on the gold rally.
Instead of buying the actual physical gold bars or an ETF that tracks that price of gold, why not buy a company that literally extracts the shiny precious metal from the ground? Barrick Gold is one of the largest gold mining companies in the industry and the stock is already up over 60% in 2020. The company mentioned in a recent press release that its strong Q2 performance means that it will achieve its full-year production targets, which is great news for shareholders. After a recent merger with Randgold, Barrick Gold now has 31 million ounces of proven and probable gold reserves on hand.
The thing to note about gold miners is that when gold prices are increasing, the mining company experiences better profit margins since its costs of production essentially remain the same. That means gold miners tend to outperform physical gold during bull markets. On the other hand, they are known to be more volatile investments and have more downside risk than physical gold should gold prices drop. That’s why if you are looking for a gold mining company that could maximize your profit potential, Barrick Gold should be on your radar.
Another interesting business model to look at if you are interested in gold is gold streamers. These businesses profit off of gold prices increasing without exposing your portfolio to the added risks and expenses of building and maintaining gold mines. A gold streamer will pay cash upfront to a mining company in exchange for the right to buy gold at a reduced price in the future. Gold miners benefit in this transaction by getting extra cash without having to go to capital markets while gold streamers profit by locking in great prices on physical gold. It’s a win-win for both parties, which is part of the reason why Royal Gold has been performing so well this year.
When you think about it, the fact that Royal Gold has low overhead costs and will have access to gold at reduced prices as the gold rally continues, it makes a lot of sense to consider investing. Shares hit new 52-week highs on Monday and the stock currently features a 0.82% dividend yield. The fact that this stock has delivered 19% CAGR in dividends per share since 2001 makes it all the more attractive.
Newmont Corporation (NYSE: NEM)
Newmont is another great gold mining stock that is poised to benefit from rising gold prices. According to an investor presentation, it’s free cash flow increases by $400 million annually for every $100 move up in gold prices using a $1200/ounce base price. The company has been around for over 100 years and has a proven track record of creating one of the industry’s best portfolio of assets. It also recently rewarded investors with a 79% year-over-year dividend increase in Q1 2020.
This is the gold mining stock to look at if you want the best in the industry, as it is the only gold producer in the S&P 500. Newmont had a strong cash position of $3.7 billion at the end of Q1 and executed over $800 million in share buybacks as well. With gold prices continuing upwards, it wouldn’t be surprising to see Newmont provide investors with more dividend growth and earnings growth going forward. This stock might just be the best bet for riding out the gold rush.
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