Here’s Why Gold Is Undervalued Right Now

The decline of crypto could lead gold stocks like Kinross Gold Corporation (TSX:K)(NYSE:KGC) to gain momentum in a favourable environment.

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In late 2019, I’d suggested that gold had the potential to rise above US$2,000/ounce. I’d like to say that I predicted a coming generational pandemic, but the call was based on trade tensions and the impacts of loose monetary policy. Today, I want to discuss why the yellow metal is undervalued in the early summer. Let’s jump in.

What is behind gold’s rise and fall since the beginning of 2020?

Gold was riding strong momentum coming into 2020. That kicked into overdrive, as the seriousness of the pandemic became apparent in Canada and across the developed world. Initially, gold suffered from the March market pullback and dipped below the US$1,500 mark. It rose above the US$2,000/ounce mark by the beginning of August.

Central banks pursued record-setting fiscal and monetary stimulus in the face of the pandemic. This spurred inflation fears and drew investors to alternative assets. Unfortunately, gold’s big run would not last beyond the summer. Instead, digital currencies started to soak up attention in a big way.

Bitcoin and its peers surged to record highs in the latter half of 2020 and the first months of 2021. Meanwhile, momentum for the yellow metal waned. There are signs that this trend is set to reverse.

Why I’m looking at the yellow metal again in the summer

Back in February, I’d looked at three reasons to snag gold stocks. The United States dollar experienced a slide into late May but has since experienced a slight rebound. Still, this is a bullish sign for gold.

Digital currencies have also fallen out of favour in the late spring and early summer. Bitcoin has roughly halved its value since rising above an all-time high of US$60,000. Crypto has attracted criticism for its large carbon footprint and has become the target of international regulators. This could push investors on the hunt for alternative assets back into the arms of gold.

Here are two gold stocks on the TSX to consider right now

Canadians should look to undervalued gold stocks in this environment. Kinross (TSX:K)(NYSE:KGC) is a top Toronto-based gold producer. Its shares have dropped 21% in 2021 as of mid-afternoon trading on July 7.

In Q1 2021, Kinross reported adjusted net earnings of $192 million or $0.15 per share — up 51% from the prior year. Meanwhile, its total liquidity surged to $2.6 billion. This gold stock possesses a very attractive price-to-earnings (P/E) ratio of 5.9. Moreover, Kinross stock last had an RSI of 36. This puts it just outside of technically oversold territory.

Yamana Gold (TSX:YRI)(NYSE:AUY) is another Toronto-based gold producer worth your attention. This gold stock has plunged 32% in the year-to-date period. That dip pushed the stock into the red for the year-over-year stretch.

The company unveiled its first-quarter 2021 results in late April. Adjusted net earnings rose to $67.2 million, or $0.07 per basic share, compared to $47.2 million, or $0.05 per basic share, in the previous year. Cash flows from operating activities were in line with numbers in Q1 2020.

This gold stock also has a favourable P/E ratio of 18. It had an RSI of 35 at the time of this writing, which also puts it near oversold levels. I’m looking to stash both gold stocks in early July.

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 Ambrose O'Callaghan has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned.

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