There's little question that this has been a challenging year for the investment community. The broad-based S&P 500 registered its quickest bear market decline in history, which was followed by the fastest snap-back rally to new highs of all time. With coronavirus disease 2019 (COVID-19) cases hitting record daily highs in the U.S. last week, there's no telling what sort of wild vacillations lie ahead.
The thing is, volatile markets often yield an incredible buying opportunity for long-term investors. After all, every single stock market correction in history has eventually been erased by a bull market rally. But there's no mistaking that some investment opportunities are going to be more lucrative than others.
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A lustrous $17 trillion opportunity awaits
Right now, there's a $17 trillion opportunity staring investors square in the eye. The only question is, will they take advantage of it?
You're probably thinking that it has something to do with cloud computing, cybersecurity, telemedicine, e-commerce, or some other innovative avenue of the high-growth tech space -- but you'd be wrong.
On Thursday, Nov. 5, Bloomberg reported that the market value of the Bloomberg Barclays Global Negative Yielding Debt Index hit a new all-time high of $17.05 trillion, eclipsing its previous high set in August 2019, of $17.04 trillion. Put another way, 26% of all investment-grade debt issued worldwide currently carries a negative yield -- i.e., you'll receive less back on the maturity of a bond than your initial investment. That's down from the record of 30% of investment-grade debt yielding a negative rate last year, but it still represents an exceptionally high figure.
What does this have to do with an investment opportunity? Simple: It's created the most lucrative opportunity for precious metal investors that we may ever see.
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This is gold's time to shine
With more than a quarter of the world's investment-grade debt yielding less than 0%, and much of the remainder carrying a yield that doesn't outpace the prevailing inflation rate, there's not much chance for conservative investors or income seekers to generate real income. As a result, this makes investors far likelier to turn to precious metals like gold as a store of wealth in the years to come.
Keep in mind that it's not just negative-yielding debt that's setting the stage for a potentially epic rally in precious-metal prices. In the United States, the Federal Reserve has been clear that it has no intention of raising its federal funds target rate prior to 2024. This means low-yielding debt is here to stay for years to come.
At the same time, the Fed, and numerous central banks in developed countries around the world, have been liberally spending to prop up financial markets hit hard by the COVID-19 pandemic. In the U.S., the Fed's unlimited quantitative easing platform, coupled with the likelihood of more fiscal stimulus from Washington, is likely to balloon the money supply and pressure the U.S. dollar. That's important, because the dollar and physical gold have an inverse relationship.
Taking into account other factors, such as supply and-demand economics regarding the supply of gold and ongoing uncertainty created by the pandemic, the outlook for gold and gold stocks has never been better.
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It's time for gold stocks to dazzle, too
However, prospective investors would be smart to avoid the temptation to buy physical gold. Instead, they should opt to own gold stocks.
Buying gold stocks as opposed to physical gold allows you to take advantage of the leverage associated with a higher per-ounce price for gold. Additionally, you may be able to collect a dividend while owning stocks (something that physical gold doesn't offer), and can benefit from management's ability to adjust output up or down, depending on prevailing market conditions.
Gold stocks have also spent much of the last eight years paring back their debt tied to the last gold bull market, which ended in 2011. Most producers have been focused on expanding output at mines with high ore grades, and have sold off non-core assets to reduce their outstanding debt. In other words, most gold stocks are financially stronger now than they were a decade ago, and in many instances are generating a cash operating margin of close to $1,000 an ounce, if not higher.
Now for that $64,000 question: Which gold stocks to buy?
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Pardon the bias, but my largest portfolio holding, SSR Mining (SSRM -2.43%), is my top stock in the industry. SSR recently completed a merger of equals with Turkey's Alacer Gold, bringing the Copler mine into the fold. The combined company's four producing assets should be capable of approximately 780,000 gold equivalent ounces on an annual basis, with an all-in sustaining cost (AISC) of around $900 an ounce.
What's more, the new SSR Mining is projected to generate $450 million in annual free cash flow in 2021 and 2022, and has well over $200 million in net cash following its merger. This looks to be a recipe for a share buyback or dividend announcement in the very near future.
I'm also a huge fan of Kirkland Lake Gold (KL), which has the best balance sheet in the gold industry. As of the end of September, Kirkland Lake had $848.5 million in cash with no debt, and had more than tripled its quarterly dividend and repurchased $526.6 million worth of its common stock since the year began.
Kirkland Lake Gold's three producing assets are also highly efficient. Even after accounting for the higher costs of the Detour Mine, which was acquired earlier this year, the company's AISC in the third quarter was $886/oz. This works out to a cash operating margin of well over $1,000 an ounce, based on the current per-ounce price for gold.
A monstrous opportunity awaits those investors willing to put their money to work in gold stocks.
