The stock market has been relatively unstoppable since the beginning of 2016. The broad-based S&P 500 has risen in value by 23% through July 2017, while the technology-heavy Nasdaq Composite is up an even more impressive 29% in that span.
However, both indexes have been left in the dust by gold stocks. The VanEck Vectors Gold Miners ETF has increased in value by 62% since the beginning of 2016, and this is actually well off of its highs over that 19-month span. You might think that the recent outperformance of gold stocks means they're now worth cycling out of, and that you should instead focus on marijuana stocks or cryptocurrencies like Bitcoin. But, this Fool has other ideas.
I believe gold stocks could be just as intriguing, if not more intriguing now, than they were in early 2016 when they started rallying in lieu of spot gold's huge first-quarter. Here are four key reasons why now could be a great time to consider buying gold stocks.
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1. The U.S. Dollar is at a more than one-year low
The first catalyst for gold is staring investors square in the eyes: the U.S. Dollar Index is at more than a one-year low, and a better than two-year low against the euro. Generally, the U.S. dollar and gold tend to move in opposite directions. A strengthening dollar is viewed as a sign of economic certainty and growth, while a falling dollar could indicate growing uncertainty and economic weakness. Then again, a stronger dollar hurts exports, while the current weaker dollar environment is precisely what President Trump, who favors a boost in U.S. exports, wants to see.
As the dollar falls, investors would be expected to seek a place to park their money that'll be a better "store of value." Gold is traditionally that safe-haven investment when the dollar falls.
2. Nothing is getting done in Washington
Secondly, you'll note that virtually nothing is getting done on Capitol Hill, at least with regard to major legislation. President Trump and Republicans have been working on an Affordable Care Act repeal-and-replace measure without success since early March. Not only has the defeat stung for the GOP since they have a majority in both houses of Congress, but healthcare reforms (specifically Medicaid cuts) are needed so that Republicans can pass tax reforms that reduce individual and corporate income-tax rates. Without healthcare reform, we could have to wait till 2018 to see genuine tax reforms take shape.
The reason this matters so much is the stock market and economists have been counting on growth initiatives created by a lower tax environment to boost GDP growth and to continue to lift stock valuations higher. But if nothing is getting in Washington, then growth estimates could be revised lower, sending investors to (you guessed it!) the traditional safe-haven investment, gold.
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3. The Fed continues to walk on eggshells
The manner in which the Federal Reserve has approached its latest round of monetary tightening is another reason gold stocks look intriguing. After seven years of a record-low federal funds target rate, the Fed finally began raising rates in Dec. 2015. Yet, in a span of a little more than a year-and-a-half, the U.S. central bank has lifted rates by just 100 basis points. Historically, this is still exceptionally low, and it's not done much in the way of boosting the yields for interest-bearing assets.
This last point is of particular importance since opportunity cost tends to drive investors in and out of gold stocks. Gold itself has no yield, which is why gold stocks, which sometimes pay a dividend, can often be a much smarter investment choice than physical gold. When the Fed raises rates, typically you'll find that yields on CDs and bonds moves higher. As yields move higher, the opportunity cost of owning gold, a non-yielding asset, goes up. But as long as the Fed continues to walk on eggshells and babies the U.S. economy, the more likely it is that gold stocks will keep thriving in a low-yield environment.
4. Gold stocks are in value territory
Lastly, but arguably most important, a number of gold stocks look to be in value territory. The reason is simple: physical gold was in a multi-year downtrend from its peak in 2011 through 2015. The roughly $850 an ounce drop in spot gold from peak to trough necessitated a cut in capital expenditures and ongoing activities from gold miners. With gold prices now more than $200 off their five-year lows set in early 2016, gold stocks are thriving with considerably lower all-in sustaining costs (AISC) and generally lower debt levels. We're witnessing far more sustainably profitable companies, and that's a good thing for long-term investors.
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Gold stocks you should consider buying
One no-brainer to consider buying is Barrick Gold (GOLD -3.98%), which is among the largest producers in the world. At the end of 2014, Barrick was lugging around more than $13 billion in debt, but by the end of 2018 has its eyes set on reducing its debt balance to just $5 billion. This is being done by selling off non-core assets, as well as through organic pay down via positive operating cash flow.
On top of having less in the way of interest expenses and more financial flexibility, Barrick also sports the lowest AISC of all major gold producers. It reaffirmed its full-year AISC forecast of $720-$770 per ounce in its recently reported second-quarter results. Having such a low AISC means Barrick can withstand a drop in gold prices far better than its peers.
While its forward P/E of 22 may not look like "value" in the traditional sense of value stocks, cash flow per share (CFPS) tends to be a better measure of value in this Fool's eyes. Traditionally, most gold stocks are valued at 10 times their CFPS. Barrick is valued at 7.7 times 2017's estimated CFPS, making it a potential steal at current levels.
If we want to use traditional valuation metrics, Goldcorp (GG) is the gold stock that may be worth buying. Goldcorp has a PEG ratio (price-to-earnings divided by growth) of just 0.6. For context, anything below 1 is typically viewed as being "cheap." And sure enough, Wall Street is expecting the company's full-year EPS to more than double from $0.31 in 2016 to $0.70 in 2019, with CFPS projected to grow from $0.92 to $2.01 over that same timeframe.
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Goldcorp's growth is a function of improving operating efficiencies and expansion in all the right places. The company has been analyzing its mines, one-by-one, in an effort to strip $250 million from its annual expenses by 2018. Goldcorp announced in its second-quarter report that it expects to realize $200 million in annual savings this year, which is a big reason why it lowered its full-year AISC forecast to $825 an ounce from $850 an ounce. Not coincidentally, Goldcorp has the second-lowest AISC of the big gold producers.
We've also witnessed Goldcorp focus on only its highest-yielding mines, with Eleonore and Cerro Negro expected to be the shining stars of the bunch following their ramp-up. With a robust development pipeline and low AISC, Goldcorp could have plenty of upside.
