It is a no-brainer these days to put some money into gold stocks. Warren Buffett knows it. Eric Sprott knows it. There is going to be a lot of money to be made in the sector in the coming years. In spite of the surprising lack of coverage on many media channels, gold’s move upward this year is very telling in the grand scheme of the economic environment.
The wind is at gold’s sails moving forward. There is no political will to stop money-printing across the world. Practically every central bank is manipulating interest rates to well below market levels in an effort to increase inflation. This will hurt savers on two fronts: through lower interest on savings and increased inflation, which will erode the purchasing power — essentially, another tax on savers.
Gold as a saver’s alternative
The good news is, there is a way investors can maintain purchasing power. By investing in gold miners, investors may be able to actually benefit from the inflationary trend. As the purchasing power of dollars decreases, it takes more dollars to purchase an ounce of the metal. That means that gold, when priced in fiat currency, becomes more valuable.
Gold miners are in the sweet spot
Gold miners right now are in one of the best situations they have ever faced — even better than the situation in the early 2010s. The margins on these companies are shooting higher for a variety of reasons, with the gold price only being one attribute.
Besides price, gold miners are benefitting enormously from the fall in the price of oil. Energy prices are one of the major input costs to gold companies. If you consider that in the early 2010s, the price of oil was over $100 a barrel, think about how this approximately 60% reduction in costs has lowered the total cost of production. That money goes straight to free cash flow, allowing companies to increase dividends, pay down debt, or buy back shares.
An example of profitability
Take Kinross Gold (TSX:K)(NYSE:KGC), for example. This company is starting to move higher, but the upward trajectory is only just beginning. This company has its financial house in order and is going to do very well in the coming years.
The stock is starting to look cheap on valuation, as its profitability continues to increase. The current price-to-earnings (P/E) ratio as of this writing was about 13.8 times trailing earnings. This P/E ratio indicates that profitability is starting to increase. Operating cash flow increased by 30% year over year as compared to Q2 2019. The company also reported that it had over $1.5 billion on its balance sheet in the quarter — a fantastic amount of cash to work with.
Although I don’t believe in buying a commodity company solely for its dividend, It is a nice bonus should the company be profitable to pay one. Kinross cut its dividend seven years ago in response to the drop in gold prices and the resulting impact on its profitability. That fact may have impacted some investors who feel a dividend is a necessary part of their investing strategy.
Well, Kinross announced that it is reinstating a dividend policy. This is positive for the company on two fronts. First of all, it indicates that the balance sheet and earnings potential is strong enough to support a dividend going forward. Also, it will likely draw income-starved investors into the sector who may not have otherwise bought shares.
The Foolish takeaway
There is a strong possibility that gold could move further to the upside. If gold continues to trend higher, gold stocks will be even more profitable than they already are at these levels. Buying a stock like Kinross will give you leveraged exposure to the gold price and a small dividend as well. Protect your wealth and start buying gold stocks today.
Here are some other golden opportunities to consider:
Renowned Canadian investor Iain Butler just named 10 stocks for Canadians to buy TODAY. So if you’re tired of reading about other people getting rich in the stock market, this might be a good day for you.
Because Motley Fool Canada is offering a full 65% off the list price of their top stock-picking service, plus a complete membership fee back guarantee on what you pay for the service. Simply click here to discover how you can take advantage of this.
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 Kris Knutson owns shares of Kinross Gold Corp.