With gold prices continuing to stabilize (some would say stagnate) at just above US$1,300 per ounce, buying gold producers has certainly been a difficult and painful task for investors of late, as many gold producers have traded sideways over the previous 12 months as increased liquidity in capital markets has largely flown into equities and has not seeped into precious metals at the same rate.
Gold is often seen as a hedge against equities, and with even the most bearish investors turning bullish in recent years (see my piece on Prem Watsa’s change in investment philosophy at the beginning of 2017), investing in gold remains a difficult trade in this environment. That said, picking and choosing select companies with the potential to outperform and holding a few gold plays as insurance against a potential bear market is never a bad idea. One company I will highlight in this article for investors is Agnico Eagle Mines Ltd. (TSX:AEM)(NYSE:AEM).
Agnico has continued to be one of the better gold companies in terms of production growth for some time now on the TSX, upgrading forward guidance on a number of occasions and producing gold at very low prices relative to its peers. Agnico is not cheap, with investors often preferring shares of Agnico over its peers, pricing in a great deal of growth at current levels. With a forward price-to-earnings (P/E) ratio of 45, investors may be turned off by the company’s valuation multiple. However, given the longer-term growth trends, Agnico is likely to be able to take better advantage than its peers given its strong margins and low sustaining costs. Thus, I believe investors should focus less on earnings and more on long-term forecasted free cash flow as indicative of where Agnico’s stock price is headed in the next five to 10 years.
In my opinion, gold producers and gold in general are investments for long-term investors looking to stash some small percentage of one’s portfolio away for a very long period, ignoring much of the short-term noise in this sector. With a number of tailwinds that may take gold substantially higher in the medium to long-term, including a depreciating U.S. dollar, a potential market correction in equities, and capital flight to safer havens, investors ought to consider companies such as Agnico as long-term plays that can be picked up for relatively reasonable prices today.
Stay Foolish, my friends.