Billionaires had been betting big that the price of gold would spike and take gold miner Barrick Gold's (NYSE:GOLD) stock price up with it. They were right, with its stock price doubling from mid-2015 through the end of the second-quarter of this year. That massive run led the funds managed by billionaires George Soros, Kerr Neilson, James Simons, and Louis Bacon to take some money off the table by selling an estimated $400 million of Barrick Gold's stock during the second quarter.
While billionaires are not always perfect investors, they are worth watching given their investing prowess. So, while it would be crazy to follow their lead and blindly dump Barrick Gold's stock too, it is at least worth digging into the data to see if these moves make sense.
An epic run
After steadily sinking for most of the past five years, the price of gold is surging in 2016 and was up 25% over the first six months of the year, enjoying its best first-half rally in decades. That run on gold pushed Barrick Gold's stock up by an astounding 169% through the first half of the year, which was its best performance ever over a six month period.
The gold price rally provided a significant boost to the profitability of miners. In Barrick Gold's case, it benefited not only from the rising gold price, but from the fact that it cut its cost of sales by 14%, which enabled the company to report its highest net income since 2013. Further, the company was able to generate $274 million in free cash flow for the quarter, which marked its fifth straight quarter with positive free cash flow. That allowed it to pay down more debt, with it cutting its total debt by $968 million since the start of the year, putting it on track to hit its full-year targets. That improving financial picture is what fueled its stunning rally.
We find similar stories at rival gold miners. Newmont Mining (NYSE:NEM), for example, grew its adjusted net income by 76.3% over last year's second quarter to $231 million while its free cash flow surged 308.4% to $486 million. While the higher gold price boosted Newmont Mining's results, it also benefited from a 3.6% decrease in its all-in sustaining costs per ounce. Newmont Mining expects those costs to improve even further later this year, enabling it to continue to cash in on higher gold prices. That is why its stock more than doubled this year, too.
Is the run done?
Both Barrick and Newmont hope to continue to cash in on the combination of higher gold prices and lower costs. That is unless the gold rally is nearing an end, which is clearly what these billionaires believe. George Soros, for example, cut his stake in Barrick Gold by 94% amid the stock's epic second-quarter rally. That timing proved to be flawless given that Barrick's stock is down 17% since the quarter ended as a result of the sinking price of gold.
The reason gold is losing its luster of late, and is currently at its lowest level in a month, is the potential that the Federal Reserve will signal that a rate hike is in the immediate forecast. That would be bad news for gold because rate hikes increase yields, which makes the nonyielding gold look less appealing. Further, rising rates tend to boost demand for the U.S. dollar, which hurts U.S dollar-priced gold. Finally, rising interest rates are intended to stamp out inflation, which is one of the key drivers of the price of gold. Needless to say, if the Fed does move, it could push gold meaningfully lower.
That seems to be what these billionaires believe, evidenced by the fact that they are cashing in their chips on Barrick Gold after its stock rallied shapely this year. While they could be wrong and gold could have further to run, the Fed is a headwind that could keep a lid on the gold price, at least in the short-term. Either way, it seems like these billionaires may have already pocketed the easy money in Barrick Gold.
Matt DiLallo has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.