It's been a wild past two weeks for the stock market. Last week, the market delivered its single-worst week since October 2008, with the iconic Dow Jones Industrial Average, tech-focused Nasdaq Composite, and benchmark S&P 500 losing 12.4%, 10.5%, and 11.5%, respectively, of their values.
Additionally, in a span of three trading sessions, we witnessed the largest single-session point decline for all three major U.S. indexes (Feb. 27), followed by the biggest single-day point increase in history for those same indexes (March 2). Stock valuations have been all over the board, and the global spread of coronavirus disease 2019 (COVID-19) is to blame.
But as fears concerning the COVID-19 illness have ramped up, so has the per-ounce price of physical gold. In February, an ounce of the shiny yellow metal briefly surpassed $1,680, marking a seven-year high.
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This is why gold prices could head significantly higher in months to come
For those unfamiliar, the traditional investment thesis behind physical gold is that it's viewed as a hedge. In other words, when uncertainty crops up or inflation heads higher, investors typically expect the yellow metal to receive a boost in value. Gold also tends to move in the opposite direction of the U.S. dollar, meaning a weaker U.S. economy is usually favorable to a higher gold price. Right now, there's plenty of economic uncertainty surrounding the spread of COVID-19, which partially explains why physical gold prices are higher.
Yet none of these factors encompasses the single biggest reason physical gold could soar in the months or years to come -- namely, plunging global yields.
With the Federal Reserve taking the surprising step on Tuesday morning, March 3, of cutting the federal funds rate by 50 basis points (its first non-meeting rate reduction since the financial crisis in 2008), U.S. Treasury yields nosedived. As of Tuesday evening, buyers of U.S. Treasury bonds were receiving just a 0.74% yield for a five-year note and an historic low of a 0.99% yield for the 10-year bond. Neither comes close to surpassing even a tame U.S. inflation rate.
This is meaningful for one key reason: Investors are looking for a place to park their money where it won't lose value. While Treasury bonds are safe, the current yield environment would result in investors losing real money over the longer term due to inflation. Though physical gold is (usually) more volatile than a government T-bond, it's liable to be viewed as a far more attractive store of wealth with yields being so low and expected to remain low for the foreseeable future.
And it's not just the United States that's sporting anemic bond yields. More than $14 trillion in global debt is currently carrying a negative yield, which is further fuel for a continued rally in physical gold.
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Gold-mining stocks are primed for success
However, I want to be crystal clear that while I see substantial upside in physical gold, I don't believe physical gold is the best way to play a rise in the price of the shiny yellow metal. Rather, I'm a much bigger fan of buying gold-mining stocks.
To begin with, companies can adjust their strategies to take advantage of more or less favorable production environments. Additionally, profitable gold-mining businesses may also pay a dividend, which is something you can't exactly get by purchasing a precious metal like physical gold. One final note: You can pore over financial statements for a publicly traded business, whereas demand data for physical gold tends to be somewhat limited. In short, buying gold stocks, which can appreciate many times faster than physical gold, is the much smarter way to go.
With that being said, there's one gold-mining stock that I find particularly attractive given the current, extremely favorable environment for the shiny yellow metal: SSR Mining (SSRM 1.44%).
SSR Mining is more of a mid-tier producer that's relied on fiscal prudence and improved operating efficiency at its three producing mines to grow its bottom line. The flagship Marigold mine in Nevada should deliver a 30% improvement in gold output between 2018 and 2021, ultimately yielding 265,000 ounces per year, while the Seabee mine in Canada has delivered record production every year since SSR Mining acquired it via the Claude Resources buyout in 2016.
SSR also has the silver-producing Chinchillas mine, which is continuing to ramp up and improve operating efficiency. In terms of gold equivalent ounce production, SSR Mining is fully capable of delivering a 20% increase between 2018 and 2021, all while lowering all-in sustaining costs per ounce of production.
SSR Mining also ended its most recent quarter with a net-cash position of around $282 million and plans to clear $115 million in debt from its books by the end of March. This will leave roughly $173 million in remaining debt in an industry that was plagued by fiscal irresponsibility in the early 2010s.
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Furthermore, the company expected to generate well over $2 in expected operating cash flow per share in 2020, and perhaps push north of $2.50 per share by 2021 as efficiencies at Marigold and Chinchillas are realized. I view operating cash flow as a considerably more important metric in the gold-mining space than the price-to-earnings ratio, considering the amount of reinvestment needed to maintain growth and increase proven resources.
Currently valued at less than seven times its estimated cash flow per share in 2021, SSR Mining remains inexpensive (a multiple of 10 times operating cash flow per share is more indicative of fair value among gold miners, based on my research). Plus, as gold rises in value, a higher percentage of revenue should wind up working its way to SSR Mining's bottom line.
If you haven't thought about adding gold-mining stocks to your portfolio, now is the time to consider doing so.
