Gold remains a popular investment option, especially among those who are concerned about inflation or the economy. With worries about both amping up in recent months, gold has started climbing, from $1,185 an ounce in early October to nearly $1,250 by mid-December. It could continue going up if these worries persist.
While buying physical gold is one way to profit off rising gold prices, investors might prefer the ease of gold stocks. Three worth putting on their watchlist this month are Barrick Gold (GOLD 1.00%), Wheaton Precious Metals (NYSE: WPM), and VanEck Vectors Junior Gold Miners ETF (GDXJ 2.23%).
Keeping an eye on the new gold standard
Matt DiLallo (Barrick Gold): In September, Barrick Gold reached an agreement to merge with Randgold Resources (NASDAQ: GOLD) and create an industry-leading gold company. The new Barrick Gold will own five of the 10 lowest-cost gold mines in the world along with two that have the potential to join them in that top tier. That strong portfolio of mines producing low-cost gold should enable the combined company to generate some of the highest margins in the industry, which should help it deliver strong cash flow to support continued investment and increasing returns to shareholders.
The combination will also create one of the strongest gold miners in the industry as Barrick Gold should have the lowest leverage ratio in its peer group. Furthermore, the company will pay a compelling dividend that Barrick intends to grow as its cash flow rises in the future, driven by its investments in expanding its low-cost gold production. That combination of balance sheet strength and shareholder returns should enable Barrick Gold to maneuver through periods of low gold prices with ease while prospering when the gold market improves.
Investors have already given their stamp of approval on the deal as shares of Barrick Gold have risen by double digits since it announced its merger with Randgold, even though the price of gold and most gold stocks have hugged the flatline. Because of that, investors might want to put Barrick Gold on their watchlist for now and see if shares lose some of their merger-induced shine before they consider buying.
Streaming... but not video
John Bromels (Wheaton Precious Metals): Gold miners invariably suffer when gold prices decline because what their mines produce isn't worth as much on the open market. And with gold prices currently trading near eight-year lows, there's plenty of pain to go around. However, investors can avoid some of that pain by investing instead in a streaming company like Wheaton Precious Metals.
"Streaming" refers to an arrangement by which a company like Wheaton provides up-front capital to a miner to build a mine and get it operational in exchange for the right to purchase precious metals from the mine at a reduced rate. And when I say "reduced rate," I mean a bargain-basement price. Wheaton's average cost for an ounce of gold is about $400. The market price of gold is currently over $1,200. And Wheaton -- which originally focused exclusively on silver mining -- has been adding more gold to its portfolio. That's helped it achieve impressive margins; its EBITDA margin on a trailing-12-month basis is currently a jaw-dropping 67.6%.
That's not to say Wheaton is a slam-dunk investment, though. Even though fluctuations in gold prices hurt streaming companies' bottom lines less than those of miners, the market still tends to punish streaming companies' share prices when gold prices dip. And the market has been particularly unkind to Wheaton, knocking its shares down more than 15% so far this year.
However, that may be a buying opportunity, as Wheaton's dividend yield is now a healthy 1.9%, outpacing its peers. Its margins are also higher than other streaming companies'. Wheaton looks like a great gold stock to keep an eye on this December.
How to play junior miners
Travis Hoium (VanEck Vectors Junior Gold Miners ETF): Gold stocks can be challenging to pick because large miners are usually conglomerates with multiple assets under their belts and equipment companies like Caterpillar that benefit from high gold prices are exposed to many other markets. Then, of course, you could just buy gold, which is the easiest way to play the asset class.
But if you're looking for miners with huge upside but not willing to bet on any one miner for fear of the boom-and-bust potential, VanEck Vectors Junior Gold Miners ETF is a great option. The ETF owns small-cap gold companies around the world, giving investors exposure to a broad range of junior gold miners.
The advantage of junior miners is that they have very highly leveraged operations. Often, if a single mine performs well or gold prices rise, their stocks can increase by multiples in a short amount of time. The downside, though, can be all the way to zero if a mine performs poorly or gold prices fall. That's why diversifying with an ETF like VanEck Vectors Junior Gold Miners is a great way to play the market, and with $4.1 billion in assets, it's a very big player in junior mining.