What: Shares of junior precious metal miners are surging today, with Seabridge Gold, (NYSE:SA), Coeur Mining Inc (NYSE:CDE), Silver Standard Resources (NASDAQ:SSRI), First Majestic Silver Corp (NYSE:AG), and B2 Gold Corp (NYSEMKT:BTG) all rallying on Friday morning:
So what: The primary driver of today's rally is the price of gold, which was up more than 1% by noon on Friday to nearly $1,275 per ounce. That pushed the price of gold up to a 13-month high and into bull market territory for the first time since 2013. That's drawing investors back to the space, with investors pouring $7.4 billion into gold funds in recent weeks, according to data.
Driving the enthusiasm for gold is the outlook that the U.S. economy is strong, therefore implying that inflation could be knocking on the door. That's after the U.S. economy added 242,000 jobs last month, which was well above the forecast of 190,000 jobs.
Macro economics aside, higher gold prices are important for gold producers because they have so much leverage to its price both to generate cash flow as well as its impact on the value of their reserves. Seabridge Gold, for example, has the highest per-share leverage of any gold producer with 0.86 reserve ounces per share, compared to 0.15 from its nearest peer. Meanwhile, Couer Mining, Silver Standard Resources, and B2 Gold are increasing gold production in 2016, which only increases their leverage to the price of gold on current cash flow. Finally, First Majestic Silver, which primarily mines silver, does have some exposure to gold, which it sells as an equivalent to silver, so it also benefits when gold prices rise.
Now what: Bottom line? Gold miners live and die with the price of gold. Recently, the gold price rally has breathed new life in the sector, fueling strong gains for smaller gold miners. That said, the direction of the price of gold is tough to predict, so today's rally could quickly fade if, for example, the current inflation fears fueling the rally in gold turn out to be unwarranted.
That's why gold investors need to focus on two things when looking at specific mining stocks. First, they need to look for companies that have low-cost production, which will enable them to continue to make money should the price of gold reverse. Furthermore, investors need to take a close look at a gold mining stock's balance sheet to ensure that it doesn't have too much debt that could weigh it down should the price of gold lose its luster. Gold producers with the lowest costs and best balance sheets are those that can survive the whims of the gold market better than their weaker peers.
Matt DiLallo has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.