Gold stocks normally tend to outperform in periods of high inflation, high economic risk, and high geopolitical risk. This is why the price of gold has rallied 55% since the beginning of 2019. This is also why I think it remains a good time to invest in gold stocks.
The outlook for gold prices
Like any commodity, gold prices are difficult to forecast, especially in the short term. This is one reason why it’s best to focus on the long term instead. We know that gold prices are affected by many things. For example, investor nervousness drives gold prices higher as they look for a safe haven. Also, inflation and a weakening U.S. dollar can both cause gold prices to rise. Today, we have a lot of factors that tell me that gold prices should continue to do well. For instance, we are in a high inflation environment.
Yet, the price of gold has been weak recently, declining almost 5% from its May highs of 2,019 an ounce. This is due to a strengthening U.S. dollar and rising optimism with regard to the U.S. economy. I view this as a good opportunity to buy, as I still believe that the longer-term outlook will be positive for gold.
Given this optimistic view on gold, it follows that I would also be optimistic on gold stocks, which have taken a hit this year. With this in mind, there are two gold stocks that I would like to highlight: Barrick Gold (TSX: ABX) and Agnico-Eagle Mines (TSX: AEM).
Barrick Gold
As one of the largest and most well-known gold stocks on the TSX and globally, Barrick Gold stock is also one of the most heavily traded gold stocks. This comes as no surprise, as it’s essentially a proxy for gold prices and the go-to name for gold exposure. Because of this, we can expect Barrick to do really well in a rising gold price environment.
So, Barrick Gold remains the gold stock of choice for investors. Yet it has not been the best-performing gold company operationally. This is evident in its margin performance as well as its returns, which have been disappointing. Other risks to keep in mind include the rising cost structure as well as the company’s exposure to numerous high-risk/volatile areas of the world where they have mining operations.
The high level of institutional ownership can be good for Barrick stock, as the pressure for shareholder friendly policies will be high. But it can also mean a lot of selling pressure if the tide turns for Barrick.
Agnico-Eagle Mines
This $33 billion gold company has its assets in politically safe, pro-mining jurisdictions. This means places like Canada and Europe. It also has cash flows that are soaring, as rising gold prices make their way to the company’s bottom line. For example, its cash flow from operations increased 246% to $2.1 billion in 2022. Also, in the first quarter of 2023, cash flow from operations increased 28% to $650 million.
Yet it seems there’s a perpetually low interest level in Agnico-Eagle Mines. This could be due to the fact that it’s lesser known and smaller than Barrick Gold. Whatever the reason, I feel that this has created a disconnect in Agnico’s stock price. In my view, it’s definitely the right time to invest in Agnico Eagle stock, as valuations are low and returns are high.
