President Trump approved a $2 trillion stimulus package to “bailout” the economy from the pandemic. The Democrats in the House are proposing another $2.5 trillion and Trump wants another $1 trillion to build infrastructure.
The Federal Reserve's balance sheet has increased from $4 trillion to $7 trillion in a matter of months.
Americans have cashed “stimulus” checks of $1,200 from Uncle Sam… and with nothing else to do started speculating in the stock market, pushing up momentum trades to ridiculous values.
We’ve seen this before.
In fact, an eerily similar event happened back in 2009, when the federal government spent trillions to "bail out" America during the global financial crisis.
The gold sector flew, throwing off huge winners. Ten-baggers were common.
Gold stocks are set to fly because it maintains value, while the paper currency –– the dollar –– is made worthless by the printing press. The more dollars there are, the less value each one has.
And the printing isn’t over.
Federal Reserve Chairman Jerome Powell has said, “While the economic response has been both timely and appropriately large, it may not be the final chapter.”
We’ve “printed” trillions of dollars out of thin air to feed Wall Street, bail out the economy, prop up bankrupt companies, and fund entitlement programs that are no longer sustainable.
Today, we’re racking up so much debt that anytime you read a statistic about it online or in the newspaper, it’s already out of date.
And we have no hope of ever being in the black again.
The Federal Reserve has made it abundantly clear that it's willing to print as much money as possible to reduce the severity of the coronavirus crisis.
But this is pure madness!
We’ll have real negative interest rates and massive currency depreciation as far as the eye can see, an environment that could drive gold to record heights over the next few months.
That's why you absolutely must own gold and high-quality gold investments.
As a Business Insider headline reads: "Gold Spikes to a Nearly Seven-Year High as Investors Flee to Safety Amid Coronavirus Worries."
And it’s only going higher.
Bank of America says gold will hit $3,000 over the next 18 months.
Three Triggers That Will Launch Gold
Trigger #1: The Largest Stimulus Plan in History
Congress passed a $2.2 trillion "bailout" package — the biggest EVER in history. Bigger than the 2008 banking bailout and 2009 Recovery Act combined. Of course, with $27 trillion in debt, our government doesn’t have the money to actually pay for all this. But that’s not a problem for the Federal Reserve. After cutting rates to 0%, it quickly opened the door to unlimited quantitative easing and is now “printing” $125 billion a day!
And the U.S isn’t the only one trying to “stimulate” itself out of this mess. Governments around the world are spending trillions to rescue their countries from the pandemic’s devastating effects. As governments destroy the value of their currencies, it only makes gold more and more attractive.
Trigger #2: Negative Interest Rates
For the first time, negative-yielding government debt has risen above the $15 trillion mark.
The trillions from portfolio managers, pension funds, and insurers looking for a return will drive gold to all-time highs.
As more and more countries move to negative interest rates, those who look to gold for safety are doing so as fast as they can. Even investors who typically avoid gold are turning to the precious metal for protection. Which brings me to:
Trigger #3: China and Russia’s MASSIVE Buying Spree
Central banks all over the world are ditching American dollars for gold. They are stacking gold in their vaults by the pallet. China and Russia are buying gold because they both want to have a hedge against their U.S. dollar holdings. They know the dollar is all but done, and when it collapses, they want gold to ensure they are insulated from the crash. China has increased its gold supply by 210% over the past decade. And Russia has quietly boosted its supply 388% since 2006, becoming the world’s largest buyer of gold.
Here’s the thing...
When the market is in chaos and the economic outlook is bleak, investors find a safe haven in gold.
But today's economic conditions are unprecedented.
Any one of these three triggers could skyrocket the price of gold.
This year alone, gold has been one of the world’s best-performing assets. It’s up more than 29%. Yet few investors are interested.
And this is exactly how gold bull markets begin — while no one is paying attention. By getting in now, all the biggest returns are still well in front of you.
This is why I own physical gold, but I really like the gold stocks — shares of companies that participate in the gold industry.
Types of Gold Companies
Gold companies generally fall into one of three categories:
- Gold producers — Companies actively mining and refining gold for sale.
- Gold developers — Companies preparing to mine gold with permitting and/or construction.
- Gold explorers — Companies exploring for gold to define economically feasible deposits.
There are also other business models active in the gold mining industry. Those models include royalty and streaming companies (companies that hold royalty and streaming deals with active gold miners), assaying firms (companies that provide assaying services exclusively to gold explorers), and prospect generators (companies that prepare property for gold exploration), among others. But more than 95% of all gold companies generally fall into one of the three previously mentioned main categories.
For investors, each type of gold company presents its own level of risk. Generally speaking, the safest gold stocks are the miners.
Own the Miners — Here’s Why:
So if it costs a miner $1,000 per ounce to pull gold out of the ground and it can sell it for $1,200 per ounce, it makes $200 per ounce in profit.
If the price of gold goes to $1,400 per ounce, the miner's profits go up 100%!
What do you think a 100% jump in profits would do for the share price of a stock? A 50% bump? Even 100%?
Sure, the investor holding physical gold made 16%, but as Entrepreneur Magazine says, "Profit is the only number that matters."
When the gold price starts to move higher, speculators move down the value chain. In the end, it's the producers and explorers that move the highest.
B2Gold Corp (NYSE: BTG)
It might not be on the same page as Newmont or Barrick, but B2Gold has grown into a senior gold producer.
And it is reasonably priced. B2Gold has an enterprise value-to-EBITDA ratio of 6.16., a price-to-book ratio of 2.55, a price-to-cash flow ratio of 10.7, and a price-to-sales ratio of 4.1.
It has a forward P/E (price-earnings ratio) of 11. That is cheap.
The company is spending $51 million on exploration this year, which gives you some possible upside catalysts.
B2Gold reported income of $83 million last quarter with an EPS of $0.07, which is up over 100% since the same quarter last year. This is mostly due to the rise in the price of gold.
The company expects to make $1.7 billion in gold sales in 2020 and produce over 1 million ounces of gold.
It has a nice cash flow of over $100 million per quarter, which helps on the dividend side.
It also means that the company has a strong balance sheet with a low risk that the company will seek more loans or dilute the shares. Not only that, but the company expects to be able to pay down its entire $425 million debt over the course of the year.
Last year, it paid down $220 million. The company expects to pay $0.80 a share in dividends.
The company is mining in eight countries and went from zero ounces of gold produced in 2007 to over a million.
The share price has done well over the past two years as the price of gold moved up 42%. It should do very well if the price of gold breaks out to new highs.
The downside, as always, is if that $51 million produces a lot of dry holes. Investors don’t like burning money for zero results. But the opposite is also true, and that said, an upmarket dry hole can be managed.
Buy B2Gold (NYSE: BTG) on strong growth, strong management, and the ever-roaring Fed printing press.
Barrick Gold (NYSE: GOLD)
Barrick Gold is a blue chip gold miner that should be the backbone of any metal portfolio.
Barrick Gold Corporation explores, develops, and mines gold and its byproduct copper. It has ownership interests in producing gold mines located in Argentina, Canada, Côte d'Ivoire, the Democratic Republic of the Congo, Dominican Republic, Mali, Papua New Guinea, Tanzania, and the United States.
The company also has ownership interests in producing copper mines located in Chile, Saudi Arabia, and Zambia. Barrick Gold Corporation was founded in 1983 and is headquartered in Toronto, Canada.
Gold production dropped to 1.25 million ounces in 1Q 2020, which was a drop of 13% from the previous quarter. Costs were steady at $954 per ounce, which was nice when the gold price was at $1,770 an ounce.
In the second quarter, production will be lower than in Q1 due to COVID-19 shutdowns, but production should go up in the second half. We do know that gold prices went up in the second quarter and will likely continue to climb for 2020.
Low oil prices will help keep costs down.
The second quarter was solid despite the COVID-19 pandemic.
Barrick produced 2.4 million ounces at the halfway point, which is right along with guidance. The company has a strong portfolio of Tier 1 assets including NGM, Loulo-Gounkoto, and Kibali.
Free cash flow jumped by almost 20% from Q1 to $522 million in Q2. The company benefited from higher gold prices and execution.
Furthermore, Barrick is shedding debt. After seven long years of a bear market, the company is running lean and mean. It reduced debt by $1.4 billion, or 25%, from the first quarter. The balance sheet is in better shape now with no significant maturities until 2033.
This has allowed Barrick to increase its dividend to $0.08 per share, which was double the $0.04-per-share quarterly dividend a year ago and a 14% increase on 1Q 2020 dividend per share.
If production jumps in the second half of the year and gold prices continue to climb, Barrick Gold will do very well.
Net debt dropped 17% last quarter, which is vastly different than almost every other equity sector that has seen debt double or more during the current COVID-19 crisis.
Gold miners are perhaps the only investment sector seeing increasing pricing power, lower costs, and lower debt.
Barrick’s 10-year plan is to produce 5 million ounces of gold every year with declining costs.
As you can see in the chart, Barrick’s share price has bottomed out, and it is stair-stepping higher.
Barrick is a buy on the dips.
As mentioned, miners like B2Gold and Barrick are going to be the absolute safest ways to play the gold market. But a good gold portfolio includes a proper balance of risk.
You’re definitely going to want to own gold miners. But it’s also wise to pepper in a few gold explorers and developers, which carry a little bit more risk. That’s because while gold production stocks will be very profitable, gold exploration stocks have the potential for absolutely huge profits with little investment.
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Christian is the founder of Bull and Bust Report and an editor at Energy and Capital. For more on Christian, see his editor's page.