On June 30th, 2020, gold prices topped $1,800.
That’s an eight-year high for the metal, and it’s also close to the market’s all-time peak of $1,900 set back in 2011.
In a time of economic uncertainty, massive amounts of government stimulus, and non-market fears permeating the world, gold will likely continue to shine—and set a new high along the way. The gold futures contract suggests the uptrend will keep going for a while yet.
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As gold prices fare, gold stocks, particularly gold mining stocks, fare much better than a gold coin or gold bar. That’s because gold mining companies have fixed costs in the short-term, so a rise in gold prices tends to rapidly improve their profit margins at a higher percentage rate than the change in gold’s price.
We expect the gold mining companies to continue to be winners in the stock market. That’s why we’ve targeted some of the best gold stocks to buy now.
Our gold stocks list includes some of the top gold stocks. We’re talking best-in-industry majors, and also some royalty companies that can provide fantastic investment returns. For where the market is at now, these plays should perform just as well as some smaller players like gold penny stocks.
Best Gold Stock #1: Barrick Gold (GOLD)
One of the biggest players in the industry, Barrick Gold explores and produces gold and copper properties throughout the world. The company’s operations span from Canada to Argentina, to Papua New Guinea, and even Mali and the Republic of Congo.
Rising gold prices have been great for the company’s financials. Revenues have increased 30 percent in the past year, and earnings have exploded by 260 percent. And thanks to relatively fixed costs, the rise in gold has led to profit margins rising to over 40 percent.
That’s a trend likely to continue, so shares still look attractive even after rising over 65 percent in the past year. That’s the power of gold mining stocks!
Meanwhile, the company isn’t terribly leveraged, with about $2 billion in net debt on the balance sheet after backing out the $3 billion in cash on the balance sheet.
Some smaller mining plays have a worse balance sheet, which can cause trouble during bear markets. Even though we don’t expect one now, it’s always prudent to plan ahead in a cyclical sector.
Shares of the company pay out a 1.1 percent dividend at the moment as well. The company typically pays out about 10 percent of its revenues as dividends, meaning that as the company’s profitability rises, so will dividends. Conversely, when revenues fall, so will the dividend. But this policy ensures shareholders get paid more when times are good.
Best Gold Stock #2: Newmont Mining (NEM)
With a market cap closing in on $50 billion, Newmont shares are running neck and neck with Barrick as the largest gold play in the sector. Its relative size means that investors looking for a gold mining company, particularly institutional investors, will be looking here first.
Newmont is a more diversified player, with gold, copper, lead, silver, and zinc properties, mostly in the Americas as well as Australia and Ghana.
Its financial metrics aren’t quite as good as Barrick Gold, with a 34 percent profit margin. And shares have only risen 55 percent in the past year. It’s still a great play overall, and the numbers are pretty close.
The one advantage that Newmont really has over Barrick right now is that its shares have pulled back just a bit more from their recent highs. Newmont is still about 10 percent off its highs, but with gold prices hitting new multi-year highs, chances are that shares will once again set new records.
As with Barrick, Newmont pays a variable dividend as well. That dividend just jumped higher by 79 percent to $1 per share from $0.56, making for a yield just under 1.7 percent. For investors looking for income in the gold space, this is one of the better plays now.
Best Gold Stock #3: Yamana Gold (AUY)
Yamana Gold is one of the mid-sized gold mining stocks, with a much smaller market cap and far lower price than Newmont and Barrick. That makes it easier for investors to buy shares and build a sizeable position. And smaller companies tend to get buyout offers from bigger companies in a bull market.
With Yamana Gold, investors can get a company with a number of operational mines in Canada, Chile, Brazil, and Argentina, all for just over $5 per share.
That low share price isn’t the whole story. Thanks to the low share price and more capital flowing into the gold mining space, the stock price of Yamana Gold is up 115 percent in the past year.
And unlike the biggest players in the space, that move has occurred as the company’s overall revenue growth slid 12 percent in the past year.
The company even pays a small dividend, as with the major players. Although its dividend yield is just under 1 percent, that’s still more income than you’ll get owning any amount of physical gold bullion.
With strong price trends in place for the metal, an inexpensively-priced gold miner is a great place for investors looking for the safety of a major player with a little bit of risk to get better returns as well. As gold’s price rises, and as costs remain mostly fixed in the short-term, gold miners offer a leveraged return relative to gold.
Gold currently has a price target of $2,000 to $3,000 by some estimates. Chances are gold stocks still have triple-digit opportunities ahead, particularly lower-priced companies like Yamana. And smaller priced stocks make for better trading opportunities.
Best Gold Stock #4: Royal Gold (RGLD)
Royal Gold is a bit different than other gold companies. That’s because it’s a royalty company. Essentially, Royal Gold makes partnership investments with other gold mining companies to develop mines.
They put cash in up front. Once the mine is operational and there’s some gold production, the company gets gold at a set price far below market value.
The genius of this business model is that there’s no operational risk on Royal Gold’s end. They own the rights to metals coming out of a number of mines, which they get to buy at a low price and then sell at today’s multi-year high market price. It’s a great cash flow business model!
The downside to this model is that the cat is out of the bag, and investors know how it works. That’s made the royalty companies the best place to invest already over the past several years.
It’s why Royal Gold shares are up only 16 percent compared to the rest of the market. But with double-digit earnings growth and a 36 percent profit margin, that steady return is likely to continue no matter how the gold market fluctuates.
This is another dividend player in the space as well, albeit with a 0.9 percent dividend. That’s better than cash in the bank at today’s zero percent interest rates, making this investment truly better than the physical metal itself.
Best Gold Stock #5: Sandstorm Gold (SAND)
Sandstorm is another gold royalty company, with a total of 191 royalty streams around the world, including such exotic locales as Mongolia, Burkina Faso, and Botswana among better known names in the metals space.
The company has been gradually building up its royalty streams over the past few years, and in its most recent quarter reported that its cost of sales were around $1,280 per ounce at a time when gold cost around $1,700. That makes for a healthy profit margin, and not too shabby a return for a company that has been working to increase its properties quickly.
The downside of the company’s rapid royalty projects is that profitability has proven difficult. The company barely made a total profit last year, and margins were just 3 percent. But that’s to be expected with a smaller player that’s starting to build up.
Overall, it appears as though the company’s timing is exceptional. They’re getting a massive number of streams just in time to take advantage of the gold rally going mainstream. This is a company that could deliver huge returns thanks to its sub-$10 price, and once the company stops investing in new projects, it can use its cash flow to fund a dividend.
Best Gold Stock #6: Franco-Nevada (FNV)
Our last royalty company, Franco-Nevada goes beyond precious metals like gold and silver to also include energy properties such as oil and natural gas.
Even with the recent weakness in the energy space, it’s been a boon for shares, with a 63 percent rally in the next year. It’s kept the profit margins a little low, around 20 percent, but revenue growth is up nearly 34 percent in the past year thanks to the company’s focus on precious metals over energy.
Those who see the economy getting overstimulated as it opens back up again, this is the best trade of all thanks to the potential move higher in energy as a result. And with shares still down a bit from their all-time highs, there’s some quick growth opportunities ahead.
The company recently increased its dividend to $1.04 per year from $1.00 even. That’s not much of an increase, and neither is the 0.75 percent dividend yield that suggests. But if shares continue to grow at double-digit rates, the low yield isn’t too much of an impediment for returns here, as they’ll likely commit more cash flow to the dividend in time.
Frequently Asked Questions:
Is Gold a Better Investment Than Stocks?
Yes, and no. It depends on the timing. From 2011 to 2016, for instance, gold was in a bear market, declining nearly half from $1,900 to about $1,050. That adversely impacted the entire sector, from gold ETFs to individual stocks.
Since 2016, gold has been trending higher each year, and now, in 2020, the yellow metal is starting to get speculative interest that is likely to send the price soaring even higher soon. That makes the gold sector look strong right now, both fundamentally and looking at the gold market with technical analysis.
Should gold see a parabolic move higher, like it did in 2011, that would be an early sign that the market rally in gold is about to end and to take some profits.
Is it Good to Invest in Gold Stocks?
At the right time, absolutely! In a bear market, gold stocks may decline as much as 80-90 percent from their peak, far more on a percentage basis than gold bullion.
But when the price trends are heading up for gold, as they are now, this small sector of the market, which has a total market capitalization less than a big tech company like Facebook (FB), tends to explode higher as lots of capital tries to pour into a small space. That makes a gold investment more than worthwhile, even after the rally has started.
Is Investing in Gold Stocks Risky?
It can be, yes. If you’re in gold during a downturn, gold stocks can decline 80 to 90 percent! That’s why it’s important to look at gold trends and make sure it’s in an uptrend before buying gold stocks.
Do Gold Mining Stocks Pay Dividends?
Many do, particularly the larger companies that are bringing the metal out of the ground, or royalty companies. Smaller mining companies focused on exploration usually don’t. Just beware that yields tend to be small, but the payouts do tend to rise when gold prices are going higher.
How do Gold Stocks Perform in a Recession?
It depends on the recession and what the response to it by the government and central banks is. Usually, gold stocks will fall with the overall stock market, but if central banks are trying to stimulate the economy, fear of eventual inflation is likely to push gold and gold stocks higher.