A recession may be approaching, and the Fed is likely to reverse monetary policy once signs become more apparent…[and] 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. [As such,] 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…
1. Newmont Mining (NEM)
- …Newmont [has] proposed acquiring Goldcorp (GG) for $10 billion, a deal that would transfer the title of the largest gold miner [from Barrick (GOLD) who recently acquired Rangold] to the newly formed company, Newmont Goldcorp.
- Most recently Barrick has proposed purchasing 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.
…Typically, we see mega deals happen at or near tops in the market or at or near an inflection point in the market [but, as] we don’t appear to be anywhere near a top…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…[providing an] 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
- Market cap of the 43 companies range 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
- …As gold appreciates or depreciates, gold miners’ profits are impacted, as the vast majority of their revenues are tied to gold…[and] 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
- …The Fed has essentially halted its monetary tightening program…[but] will very likely reverse its path once a recession is firmly in sight…
- 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…
- 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
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…[as] levels of 80 or above have been seen before other major rallies, such as the one in the early 2000s, in 2008, and in 2016…