Can you believe what’s happening? While Central Banks print trillions of new dollars, oil prices recently turned negative. It could be a Goldilocks environment for strong, well-capitalised miners like Barrick Gold (TSX:ABX).
Even a modest rise in gold prices can have a tremendous impact on its bottom line — and oil is one of Barrick’s biggest expenses.
Its profits could potentially explode.
Lots to like about Barrick — even before this happened
In 2011, when gold hit its U.S. dollar peak, Barrick was $52-per-share at writing — then gold crashed and Barrick followed, plunging as low as $8.50. Today, at roughly $40, Barrick is still an amazing bargain.
Its balance sheet is in better shape than it was 10 years ago, and debts have been dramatically reduced. Today, you’re buying a stronger company. What’s more, the amount of currency printed (a big driver in the price of gold) has skyrocketed.
The Bank of America recently predicted $3,000 gold within 18 months.
That’s about 50% higher than its 2011 peak. And remember, that’s not a statement from a gold bug: That’s the Bank of America.
You can print more dollars, but you can’t print gold
That’s why gold is only getting more attractive.
Over the long term, gold has proven itself a safe store of value.
With miners like Barrick, your potential upside is even higher because a modest rise in prices can multiply its profits. I explained this in a recent article on Pan American Silver.
Suppose it costs $1,000 to dig up one ounce of gold. Right now, you can sell that ounce for about $1,700 — a $700 profit.
Now, suppose prices did rise 76% to $3,000. The miner’s profits would increase $2,000 – a 185% profit boost.
Admittedly, during the recent crash, gold declined, and it could happen again. However, it’s important to know why gold went down. It’s not for the same reason as stocks.
During a market crash, traders and hedge funds are scrambling for cash to meet margin calls. Gold is a highly liquid asset. They can usually find a bid, so they sell.
After falling, gold quickly rebounded, as did the miners. Barrick hasn’t been this high for seven years! Meanwhile, the Dow Jones Industrial Average and the S&P500 averages haven’t even come close to a recovery.
Coronavirus could be another short-term risk
However, Barrick has over a billion dollars of free cash flow. Its assets are diversified all over the globe. In short, I expect it to weather this storm.
And don’t forget, the gold in those mines isn’t going anywhere. It has been underground for a few billion years. It’s not going to suddenly get up and run away.
As I see it, Barrick Gold is the quintessential Foolish investment.
It has a track record of surviving tough markets. And I believe gold is just getting warmed up for a long-running trend higher.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.
Fool contributor Alex Busson owns shares in Barrick Gold.