All the way back in 2019, I’d discussed why gold had the potential to soar to new heights in 2020. Of course, no one could have predicted the destabilizing impact of the COVID-19 pandemic. The global crisis lifted the yellow metal past the US$2,000 per ounce mark, hitting a new record. However, gold stocks retreated into the fall of 2020 as digital currencies like bitcoin soared. Bitcoin’s rise has been impressive, but I’m still on the gold train for the long term. Today, I want to look at three reasons why investors should pile into gold stocks today.
A weak U.S. dollar is bullish for gold stocks
The weakening U.S. dollar played a significant role in the rise of alternative assets in 2020. However, the dollar has rebounded in late January and early February. Unsurprisingly, this has generated downward pressure for bitcoin and the spot price of gold. The U.S. stimulus debate has positively impacted the dollar’s recent rise. Stimulus cheque amounts are trending downward according to recent reports, which has been good for Treasury yields. Moreover, the U.S. will be one of the first countries to be fully vaccinated.
On the other hand, loose monetary policy and trade pressures could bring the dollar back down. This could be good for gold stocks like Barrick Gold. Barrick is one of the largest gold producers on the planet. Its shares have climbed 20% year-over-year as of early afternoon trading on February 2. However, the stock has dropped 18% over the past three months.
Monetary policy continues to favour alternative assets
Central banks around the world have grown even more dovish in the face of the COVID-19 pandemic. The Bank of Canada and the U.S. Federal Reserve have indicated that rate hikes will indefinitely be put on hold in this environment. Canada has even flirted with the potential of dishing out its own version of quantitative easing. Meanwhile, the Fed has been liberal with its monetary instruments in order to combat this crisis.
These conditions have been great for cryptocurrencies in late 2020 and early 2021. Bitcoin, the top crypto by market cap, soared to over US$40,000 to start the year. However, this has proven to be a solid ceiling after it fell back into the 30s.
Gold stocks like Kinross Gold (TSX: K)(NYSE: KGC) should also benefit in this monetary climate. Shares of Kinross have climbed 39% over the previous year. However, the stock has been relatively flat in 2021 so far.
In Q3 2020, Kinross announced that it was on track to meet its full-year guidance. Operating cash flow more than doubled to $544 million in the third quarter. Adjusted net earnings almost tripled to $310 million or $0.25 per share. The stock offers a quarterly distribution of $0.03 per share, representing a modest 0.8% yield. Better yet, shares of Kinross boast an attractive price-to-earnings ratio of 8.2.
Gold stocks may rise as market volatility returns
Market volatility returned to North America in the last week of January. This was exacerbated by the rise of GameStop as retail investors wrestled with short sellers. Hedge funds saw the most position covering since the height of the financial crisis over a decade ago. This should set off alarms for investors, especially in an overheated market.
Gold has historically been held as a hedge against volatility. Last year, it strengthened its case and rose to all-time highs. Yamana Gold is another gold stock to consider today. It is one of the largest producers based in Canada. Yamana stock has climbed 19% year over year. The company is still gobbling up strong earnings on the back of the heightened spot price of gold.
