Since the beginning of 2016, physical gold and silver, as well as investors in physical precious metals and gold and silver stocks, have been taken for a wild ride. After hitting multiyear lows in early 2016, gold and silver rallied more than $300 an ounce and $7 an ounce, respectively, before running out of steam last summer. Since then, there have been some pretty notable swings caused by the Federal Reserve, economic data releases, and political uncertainty.
More recently, both gold and silver have come under pressure, mainly as a result of the Federal Reserve increasing its federal funds target rate for the third time in six months. After seven years of essentially record-low interest rates, the Fed has pushed its fed funds target higher by 100 basis point since December 2015 to a range of 1% to 1.25%, which has, in turn, lent to higher yields on interest-bearing assets. Higher-yielding safe assets like bank CDs and bonds are often the No. 1 enemy of precious metals since the opportunity cost of passing up these near-guaranteed assets rises as interest rates increase. By comparison, gold and silver have no dividend yield.
9.5 trillion reasons to consider buying gold and silver stocks
However, there's a mammoth reason why precious-metal investors and gold and silver stock shareholders should be brushing off these recent Fed rate hikes and looking toward a future that could very well include much higher per-ounce prices for gold and silver.
According to Fitch Ratings, $9.5 trillion worth of sovereign debt was yielding a negative interest rate as of May, a 10.5% increase from the previous month. In other words, bondholders are paying the government to hold their money. The Swiss 10-year note, German two-year bund, and Japan's two-year note were all sporting negative yields this past week. It should be noted, though, that countries like Japan are purposefully using negative interest rate policies while Germany is not. Negative-yielding German bunds are a direct result of strong bund demand (remember, bond yields and bond prices have an inverse relationship) and not a purposeful push to negative interest rates by its central bank.
The idea behind negative-yielding interest rate policies, and negative-yielding rates in general, is to discourage hoarding money in a savings account and to encourage investment in stocks, as well as business expansion via loans.
But certain Wall Street pundits view a rising amount of negative-yielding sovereign debt as a disaster waiting to happen. Bond king Bill Gross refers to negative-yielding government debt as an impending "supernova," while Deutsche Bank CEO John Cryan has suggested that negative debt could have "fatal consequences." Though central banks tend to be the biggest buyers of bonds in these negative-yielding countries, investors have demonstrated pretty clearly that they see little hope of sustained economic growth anytime soon for select developed countries -- and that's usually great news for gold and silver.
These two gold and silver stocks should be on your radar
Even with a number of other factors influencing gold and silver, it is encouraging that negative yields will indeed act as a superior catalyst to push per-ounce prices higher over the intermediate and long term. In fact, I've opined that gold will see $2,000 an ounce before it sees $1,000 an ounce (despite being much closer to $1,000), and I'm standing by that prediction. With this in mind, here are two gold and silver stocks you should be keeping a close eye on and considering for your portfolio.
One of the smartest gold stocks to consider buying as an investor is Barrick Gold (NYSE:ABX). The reason is pretty clear: It has the lowest all-in sustaining costs (AISC) of all of the major gold miners. The company stood by its full-year forecast in its first-quarter press release of AISC ranging from $720 per gold ounce to $770 per gold ounce. Based on today's spot price for gold, we're talking about a $500-an-ounce margin.
Barrick has been able to maintain such low AISC as a result of internal discipline and debt reduction. It has turned its attention to only its highest ore-grade projects and has routinely come in under budget with regard to its capital expenditures. It recently noted that its projected capex spending for 2017 and 2018 was also on track to be below initial forecasts. It also doesn't hurt that copper production can be used as a byproduct against its gold mining costs.
At the same time, Barrick has shaved more than $5 billion off its total debt. At the end of 2014, the company had amassed $13.1 billion in debt. It's since been selling off non-core assets and funneling some of its operating cash flow toward its debt. The company has a goal of cutting its total debt to just $5 billion by the end of 2018, and it appears to be on its way to achieving this goal.
And just in case you were worried, Barrick has a healthy expansion portfolio. For example, the Goldrush mine in Nevada could become one of its crown jewels, with expected production of up to 440,000 ounces a year by 2021.
It's possible that no traditional gold miner delivers a lower AISC (and thus better margin) than Barrick Gold.
Wheaton Precious Metals
Wheaton isn't a traditional mining company in the sense that Barrick Gold is. Wheaton provides large sums of cash up front to help miners in their efforts to develop a new mine or expand an existing one. In return, it receives a fixed amount of production over a long period of time at a well-below market price. The advantages of this strategy are pretty obvious: exceptionally low labor costs since the company isn't involved in the day-to-day operations of its contracted partners and a well-diversified portfolio. This means weaker production at one mine isn't going to cripple Wheaton's results.
According to the company's first-quarter results, its average cash costs (not to be confused with AISC) were just $4.54 per silver ounce and $391 per gold ounce. This equates to roughly a $12-per-ounce margin on silver today and a roughly $850-per-ounce margin on gold. These enormous margins allow the company to immediately benefit from an increase in gold and silver spot prices, even more quickly than traditional miners. It's also been a key reason why it pays a dividend and most mining companies do not.
Wheaton Precious Metals has also done a good job of balancing its product portfolio in recent years. For the third straight quarter, it generated roughly an equal amount of revenue from gold and silver sales. Being balanced further allows the company to withstand production hiccups from its partners, such as the two-month mine strike at San Dimas in the first quarter that impacted silver production.
Within the gold and silver industries, you'll struggle to find a company with better operating margins.