Gold Might Be Broken, But Kirkland Lake Gold Is Still a Buy

Gold miners have underperformed my expectations of late, but I think over the long-term Kirkland Lake Gold (TSX:KL)(NYSE:KL) will outperform.

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It’s hard to like gold right now.

The price of the precious metal continues to pinball around in an erratic, but mostly downward fashion. This comes despite numerous tailwinds that should have been very strong catalysts for gold in the near-term.

Nonetheless, in this article, I’m going to dive into what I think investors should keep an eye on for gold, as well as my top pick in this sector: Kirkland Lake Gold (TSX:KL)(NYSE:KL).

Is gold broken?

Honestly, I’m starting to lose faith in gold as a true inflation hedge.

Ever since the gold standard was removed, gold has indeed performed relatively well, providing investors with mid- to high- single-digit annual returns in recent decades. Gold has underperformed equities, but has still provided a decent inflation hedge in its own right.

In recent years, gold, and more specifically gold miners, have not traded as negatively correlated equities with respect to the broader stock market. Indeed, during the March crash last year, gold miners were initially down along with the rest of the market. Yes, gold rallied substantially and had its best run in recent history. However, this came after stomach-churning volatility in the sector. Volatility I didn’t expect to see materialize.

With so much in the way of stimulus being pumped into the economy right now, gold should do well. Real interest rates are still negative (though inflation expectations have increased). That’s bullish for gold. The U.S. dollar is weak, and could get weaker on increased stimulus over the medium-term, also a positive.

However, these factors seem to be less important today than in the past. Maybe the rise of cryptocurrencies as a store of value has destroyed the aura of gold.

Whatever the case, I’m still a staunch believer in the long-term benefit having a small allocation to gold can have for investors. In that context, here’s why I think Kirkland Lake is a winner!

Why should investors consider Kirkland Lake Today?

Kirkland Lake is perhaps the most fundamentally-sound gold miner on the TSX today.

The company’s strong and stable cash flow generation, and its top-tier mining operations in Canada and Australia provide a level of defensiveness that’s hard to find. Additionally, the company’s valuation reflects a deep value opportunity today. Kirkland Lake trades at less than 12-times earnings, a dirt cheap valuation for a company that is iron-clad.

Honestly, I don’t understand why this stock is so cheap today, given its quality. This is perhaps the best find on the TSX right now, and gold bug or not, this stock should outperform in the short, medium, and long-term in my view.

I’d highly recommend investors looking for a stock to buy today to do so on the dip. Kirkland Lake dropped more than 5% this morning before recovering intra-day, at the time of writing. This is a great buying opportunity on any such dips moving forward, in my view.

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 Chris MacDonald has no position in any of the stocks mentioned.

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