Gold blasted off in 2020, and for good reasons. Has the rocket lost its thrust? We don’t think so. The new Biden administration is likely to follow an audacious money printing policy that could fuel gold higher.
In 2017 IBR called a $2500 gold spot target when it was only trading at $1291. Quite a ride. The reasoning was straightforward:
“Inflation, geopolitical risk, jewelry, and industrial demand, currency hedge, and many more reasons to own gold so say the pundits.”
Our timing was a bit off, but hey who could have predicted a worldwide virus pandemic.
No matter which way you lean in terms of the price of gold, any proper portfolio should have precious metals such as gold in it. It is very unlikely that gold would fall precipitously even if it went down. Any weakness can serve as a good entry.
How can I invest in Gold?
There are ETF’s such as VanEck Vectors Gold Miners ETF (GDX), which follows gold stocks. Another ETF that is a commodity trade play is SPDR Gold Shares ETF (GLD).
You could buy the physical gold itself. Some sources tell us that historically you would do better with the stock.
There are risks associated with individual gold mining stocks. Aside from the obvious risk, the mine simply runs dry. Or the price falls to a level mining becomes unsustainable. For example, of that is Newmont Mining, which said its “production costs are $966 per ounce in 2019″.
If the price of gold crashes to $800 per ounce they won’t be digging for a while.
Geopolitical risk is another, Barrick Gold has a dispute with New Guinea, if not resolved then the lease may end.
Gold mining companies may be more rewarding. Let’s examine three.
First, we should clarify a term used here. Free Cash Flow, that simply means the residual cash from operations. Unlike net income, it does not include non-cash items.
Kirkland Lake Gold, (NYSE: $KL)
After Kirkland concluded a merger with Detour Lake earlier this year it generated $418 million in free cash flow. Kirkland comes in as this writer’s pick of the day because of its $537 million in cash and no debt. The acquisition adds to its asset value as well. It’s operating mines are in Canada and Australia, which reduces any geopolitical risk.
Barrick Gold (NYSE: $GOLD)
Berkshire Hathaway has taken a position. A large gold miner with the second largest industry market cap. In the second quarter, they produced 1.15 million ounces. Similar to Kirkland, Barrick used the higher gold price to clean up a lot of debt. This brings free cash flow up 849% to $522 million. Barrick also raised its dividend to $.08 per share. It has mines in several parts of the world including the US.
AngloGold Ashanti (NYSE: $AU)
This is a fairly diverse company in the business of gold, uranium oxide, and sulfuric acid. They operate in many countries. Their costs are roughly in line on the high side per ounce at $1,044 per ounce. They claim their production dropped because of the pandemic but at 837,000 ounces, they were still above last year.
They also announced an increase in their dividend to two payments a year and from 10% to 29% of Free Cash Flow. They still have debt, however, because of high gold prices, it dropped to a decade low of $875 million.
Their quarter ended in September with Free Cash Flow of $339million. They operate in many countries such as Argentina, Australia, Brazil, Ghana, Guinea, Mali, Namibia, South Africa, Tanzania, and the United States of America.
There are some potential risks. Some countries restrict the amount of cash that can be repatriated at one time. Another potential concern is VAT or value-added taxes that different countries levy on the company. In some countries, taxes were mentioned as going down.
One interesting statement in the quarterly call was their budgeting assumptions based on a gold price of $1,400 per ounce. With this number in mind, management continues its plan to use the added cash flow to reduce debt and believes they can easily make the new dividend payments.