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Gold at $2,500? Silver at $30? It's Possible Sooner Than You Realize

By Sean Williams - Jul 22, 2020 at 7:21AM

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We may be on the cusp of a monster rally in precious metals, along with gold and silver stocks.

There's little question that this has been one of the wildest, weirdest, and most disruptive years ever on Wall Street. The coronavirus disease 2019 (COVID-19) pandemic has completely upended societal habits, tossed profit expectations for a lot of brand-name businesses out the window, and ushered in unprecedented levels of stock market volatility.

But not every investment is necessarily hurting. While most folks are likely aware of the outperformance of the FAANG stocks and select technology trends in 2020, they may have overlooked one of the most robust rallies of all -- the increase in the physical price of gold and silver.

A messy pile of gold and silver ingots.

Image source: Getty Images.

Gold at $2,500 an ounce and silver at $30? More feasible than you think.

When the closing bell rang on Monday, July 20, physical gold ended at nearly $1,818 an ounce, marking its highest close the middle of September 2011. Meanwhile, physical silver closed at $19.88 an ounce after nipping at the $20 mark throughout the session. For silver, this represents its highest close in four years. Over the trailing year, gold is up 28% and silver has increased by 23%.

Generally, physical metals are slow-moving. But given the perfect storm of catalysts in the current environment, gold at $2,500 an ounce and silver at $30 an ounce is not only possible, but it could happen a lot sooner than you probably realize.

Before I dive into the many reasons why gold could hit an all-time high and silver could make a run at its highest per-ounce price in at least seven years, let me remind you what happened the last time conditions for a precious-metal rally were so favorable.

With the U.S. economy seemingly spiraling out of control during the financial crisis and Great Recession, gold and silver both skyrocketed for a roughly two-year period between the midpoint of 2009 and the summer of 2011. Silver would more than quadruple in value at its peak from its 2009 opening value of $11.08 an ounce, with gold more than doubling from $910 an ounce in mid-July 2009 to around $1,900 an ounce at its peak.

It took just two years for the most prominently traded and held precious metals to effectively quadruple and double in value. It's happened once, and it could happen again, especially with the catalysts currently on the table.

An assortment of gold ingots next to a rising chart.

Image source: Getty Images.

Here's why even more lustrous days are ahead for gold and silver

One of the more prominent reasons gold and silver are on fire, and should remain that way for the foreseeable future, can be traced to nonexistent global bond yields. In August of last year, approximately $17 trillion in global debt bore a negative yield. Today, while this figure has almost certainly eased a bit, bond yields remain anemic. Even in instances where income seekers can net a positive yield on a bond, it's often so low that, over time, the nominal return won't outpace inflation. This is a fancy way of saying that bond investors risk losing real money by playing it safe. 

Rather than buying bonds, investors are increasingly likely to trust gold or silver as a store of value. This is a roundabout way of saying that these precious metals will be perceived as a better way of fighting inflation over the long run than purchasing bonds.

To build on this point, the U.S. Federal Reserve has made it abundantly clear that it'll hold a dovish stance on monetary policy through 2022. This means keeping its federal funds target rate at an historic low of 0% to 0.25%, as well as actively pumping liquidity into the system through what the central bank described as "unlimited QE." QE, or quantitative easing, involves the Fed boosting the nation's liquidity. It can do this by purchasing mortgage-backed securities or even corporate bonds.

A printing press churning out one hundred dollar bills.

Image source: Getty Images.

The fact that the Fed aims to leave its federal funds rate untouched for another 2.5 years suggests that bond rates will remain historically low. At the same time, pumping tons of liquidity into the system and ballooning the money supply in an effort to promote inflation is almost always a recipe for higher precious-metal prices.

Another reason to be highly bullish on gold and silver is simple supply and-demand economics. On top of investors purchasing more physical gold and silver during periods of heightened fear and volatility, the COVID-19 pandemic has shut down various mines throughout the world. Put plainly, we're seeing demand for precious metals soar at a time when supply is lower than usual. When demand outpaces supply, prices will rise until supply increases or demand decreases.

Mining stocks are about to party like it's 2011 all over again

Suffice it to say that things are looking good for gold and silver at the moment. But I wouldn't suggest investors buy physical metals. Instead, the smarter bet is to leverage these precious-metal price increases by owning gold and silver stocks.

By owning a stake in an individual mining stock, you're opening the door to a possible dividend and can taking advantage of the flexibility of a management team to adjust its operations to match current market conditions. Additionally, you can pore over income statements and a company's balance sheet. None of this is possible when owning a physical metal like gold or silver.

With that being said, there are a number of mining stocks that I'm a huge fan of that should thrive on higher gold and silver prices.

An underground excavator operating in a mine.

Image source: Getty Images.

My single largest portfolio holding for years has been SSR Mining (SSRM 0.00%), which looks set to complete a merger of equals with Alacer Gold (ALIAF) very soon. The combined entity will be capable of approximately 780,000 gold equivalent ounces (GEO) of output per year, with an expected $450 million in annual free cash flow, through 2022. SSR Mining brings its flagship Marigold mine to the table, but has delivered one record year of output after another from expanding its Seabee mine. Meanwhile, Alacer's Copler mine in Turkey has been a highly efficient, low-cost mine. The new SSR Mining should have about $200 million in net cash, trade for less than 8 times 2021's projected cash flow per share, and be capable of all-in sustaining costs (AISC) of around $900 per GEO.

Also on the gold side of the equation I'm a fan of Kirkland Lake Gold (KL). Kirkland Lake has grown via acquisition, and has one of the lowest AISC's in the entire industry. During the first quarter, AISC came in at $776 an ounce, which based on the current spot price for gold would mean a cash operating margin of over $1,000 per ounce. Kirkland Lake's balance sheet also happens to be pristine, with nearly $531 million in cash and cash equivalents and no debt. Further, don't overlook that Kirkland Lake Gold doubled its dividend in the first quarter and repurchased 9.7 million shares for about $330 million.

As for silver exposure, First Majestic Silver (AG 1.46%) is potentially the smart way to go. No mining stock generates more of its total revenue from silver than First Majestic – it ranges between 60% and 70% of total sales. Higher silver prices would allow the company to take a handful of its mines off of care and maintenance and put them back into production, while also boosting cash flow from the company's three operational mines in Mexico. Following multiple years of disappointments on the production front, 2021 and beyond should yield significant improvements in cash flow and profitability for First Majestic Silver.

Sean Williams owns shares of First Majestic Silver and SSR Mining Inc. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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Stocks Mentioned

First Majestic Silver Stock Quote
First Majestic Silver
$7.79 (1.46%) $0.11
Kirkland Lake Gold Ltd. Stock Quote
Kirkland Lake Gold Ltd.
SSR Mining Stock Quote
SSR Mining
$14.70 (0.00%) $0.00
Alacer Gold Corp. Stock Quote
Alacer Gold Corp.

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