Inverted rates, a clear slowdown in corporate earnings, decade-low unemployment numbers, and numerous other signals are gradually starting to suggest that a recession is near. On the other hand, gold and gold miner prices have been relatively subdued in recent years, and have only recently begun to show signs of life.
As the recession approaches, gold and gold miners should experience additional demand, thus gold miners are likely to be amongst the top performers going forward. In this article, I discuss 3 specific gold mining names that should help your portfolio shine going forward.
1. Newmont Mining (NEM) – Mergers are happening in the gold mining space, and Newmont appears to be in the center of attention.
First, Barrick (GOLD) acquired Randgold, creating the largest gold mining company in the world. Next, Newmont proposed to acquire Goldcorp (GG) for $10 billion, a deal that would transfer the title of largest gold miner to the newly formed company, Newmont Goldcorp. However, most recently, Barrick proposed to purchase Newmont as well, valuing the company at around $33.50 a share.
It is important to mention that the $33.50 price can be perceived as the initial offer, and if a deal does occur, it would very likely take place at a higher price, closer to $40. Right now, Newmont is around $35, and the takeover offer puts a nice base under the company’s price.
Regardless of whether this deal occurs or not, Newmont should be trading higher going forward, either due to a higher takeout offer, or due to the company’s ability to create higher profits after its Goldcorp merger.
Another aspect to consider is why all these deals are occurring in the gold mining space to begin with. Typically, we see mega deals happen at or near tops in the market or at or near an inflection point in the market.
We don’t appear to be anywhere near a top, therefore, this is likely an inflection point, following which gold and gold miner prices are likely to enter a prolonged period of appreciation.
2. Kirkland Lake (KL) – Kirkland is a growing gold mining company, targeting a production rate of 1 million ounces this year. Kirkland’s revenues jumped by more than 22% last year from around $747 million to $916 million. Earnings at the same time surged by 107% to $274 million.
These results highlight the company’s extremely high net earnings margin of nearly 30%. Naturally, the stock has performed very well, and despite the recent pullback, it is still up by nearly 100% over the past year. As KL continues to expand, grow production, and increase revenues, its stock should also perform quite well going forward.
3. VanEck Vectors Junior Gold Miners ETF (GDXJ) – GDXJ is comprised of 43 gold miners ranging in market cap from several hundred million dollars to several billion dollars. Top holdings include Kinross (KGC), Evolution Mining (OTCPK:CAHPF), Northern Star Resources (OTCPK:NESRF), and others. The fund’s top ten holdings account for roughly 44% of the entire weight of the fund.
As gold embarks on its path to higher prices, gold miners and junior gold miners should do extremely well going forward. With GDXJ, market participants get exposure to a diverse basket of small to medium cap gold mining stocks which should move aggressively higher over time.
Following The Price of Gold
Gold miner prices are essentially tethered to prices of gold. As gold appreciates or depreciates, gold miners’ profits are impacted, as the vast majority of their revenues are tied to gold. Another factor to consider is that gold miners typically appreciate and depreciate in magnitudes relative to gold. For instance, if gold rallies by 5% to 10%, gold miners could rally by 15% to 30%. Therefore, as gold proceeds to go higher in the future, gold miners should perform particularly well during this time.
Why Gold Miners Will Outperform in a Recession
There are several reasons why gold miners will likely shine in a recession. Gold miners typically follow the price of gold regardless of the broader stock market trend, and there are numerous elements likely to push gold higher going forward.
First, there is the Fed, which has essentially halted its monetary tightening program, and will very likely reverse its path once a recession is firmly in sight. In fact, there is now an overwhelming chance (about 71%) that rates will be lower 1 year from now.
Lowering rates and introducing fresh rounds of QE will increase both the monetary supply as well as the overall credit flow, thus putting pressure on the dollar and enabling gold prices to rise.
Another reason gold and gold miners will outperform in a recession is bond rate related, but also ties back in with the Fed. As the Fed lowers rates to combat slow growth, it will bring bond rates down in the process. Lower bond rates increase credit circulation while pushing investors towards riskier assets like stocks.
Inadvertently, investors will also be pushed towards gold, as bonds and gold essentially compete for the “safe-haven” asset class. Additionally, gold and gold miners will likely experience further demand as broader equity markets decline in a recession. Investors often flock to gold in times of fear and uncertainty, and there is no reason why this time should be any different.
Gold to Silver Ratio
One factor I want to draw attention to is the gold to silver ratio, which is at an extreme level right now, witnessed only several times in recent history. The gold to silver ratio recently climbed to 87, a level only seen once in recent history, right before the awesome gold and silver bull market following the 2008 financial crisis. Other levels of 80 or above have been seen before other major rallies, such as the one in the early 2000s and in 2016.
Right now, the gold to silver ratio is at around 85, an extremely elevated point which is likely suggesting that a rally in gold and silver prices is approaching. This also coincides with the Fed’s pause in monetary tightening, and a likely return to easing once signs of the impending recession become more evident.
The Bottom Line
There is a lot of activity going on in the gold mining sector, and probably for good reason. A recession may be approaching, and the Fed is likely to reverse monetary policy once signs become more apparent.
A reversal in Fed policy would likely weigh on the dollar as well as on bonds, fundamentally bullish factors for gold prices. As gold proceeds to move higher, gold mining shares should perform particularly well.
Market participants may want to build exposure to the gold mining space, and a good place to start is through the ownership of 3 names. Newmont, a company amid some of the most interesting mergers and acquisitions the gold space has seen in years; Kirkland Lake, a fast growing, high potential gold miner; and GDXJ, a junior gold mining ETF with diverse exposure in the sector.
Want to know more? If you’d like full articles that include technical analysis, trade triggers, portfolio insight, option strategies, and much more, consider joining Albright Investment Group!
- Subscribe now and obtain the best of both worlds, deep value insight, coupled with top-performing growth strategies.
- Receive access to our top-performing portfolio that outpaced the S&P 500 by 19% in 2018.
- Take advantage of this limited time 2-week free trial offer now and receive 20% off your introductory subscription pricing. Click here to find out more!
Disclosure: I am/we are long NEM, GDXJ, KL. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: This article expresses solely my opinions, is produced for informational purposes only and is not a recommendation to buy or sell any securities. Investing comes with risk to loss of principal. Please consider consulting a professional before putting any capital at risk.