As you may know, gold is known as a safe haven. This means that gold holds its value better than most financial instruments. Today, increasing geopolitical turmoil, the threat of economic recession driven by rapidly rising interest rates, and a general feeling of malaise in the market are all driving up uncertainty. Gold stocks can shelter our money from these risks.
Where are gold prices headed?
Today, gold is trading at just under $1,950 per ounce. This is more than 400% higher than 20 years ago, 59% higher than 5 years ago, and 18% higher than last year.
Looking ahead, a few factors could make us bullish on gold prices. For one, gold is correlated with inflation. This means that as inflation rises, the price of gold rises. Inflation negatively affects the value of the dollar, but gold is not impacted by this – it’s a good store of value. Thus, gold is an asset that would be in high demand as inflation rises. Essentially, this happens as investors sell the dollar and look for an asset that isn’t affected by inflation numbers, like gold.
The very reason that rates have been rising is to combat inflation. So, until this move is successful in doing so, gold can bridge the gap by hedging against other assets that are falling in value. Here are a couple of gold stocks for you to consider for exposure.
Agnico-Eagle Mines
My personal favourite gold stock is Agnico-Eagle Mines Ltd. (TSX:AEM). This is because throughout its history, Agnico has taken very deliberate steps to minimize its risk profile. This all starts with the company’s decision to focus its operations in politically safe, pro-mining jurisdictions. These jurisdictions include Canada, Europe, Latin America and the United States. This has set Agnico up as a company that is immune to the elevated country risk that many other gold companies face.
As a result of this and Agnico’s other conservative business practices, the company has consistently provided strong cash flow generation and dividend growth. In fact, Agnico’s sound operational and financial practices have driven operating cash flow growth of 246% versus five years ago, to $2.1 billion in 2022. This represents a CAGR of an impressive 28%.
Furthermore, 2022 free cash flow was $559 million compared to negative free cash flow in 2018. Finally, all of this has culminated in a rapidly rising dividend – Agnico’s dividend increased 283% in the last five years, or at a compound annual growth rate (CAGR) of 31%.
Barrick Gold
Barrick Gold Inc. (TSX:ABX) is a different beast entirely. It has many of the risks that Agnico has been able to avoid, such as the risks of unstable jurisdictions. Yet, Barrick Gold stock remains the gold stock that most investors turn to for exposure. It has become almost like a proxy for gold as it’s the most well-known gold stock around the globe.
Yet, Barrick Gold’s operating performance is far below that of Agnico Eagle. For example, Barrick has grown its operating cash flow 97% to $3.5 billion in the last five years. This represents a CAGR of 14.5%, far below Agnico’s 28%.
Similarly, Barrick’s free cash flow has also been subpar, growing a mere 18% in the last five years, for a CAGR of only 3.4%. Finally, Barrick Gold’s stock price has increased 32% in the last five years. This compares to Agnico-Eagle stock’s 39% return.
In my view, it is likely that gold stocks will benefit from the economic turmoil that we find ourselves in today. While I think that Agnico-Eagle’s stock has more upside than Barrick Gold’s, I think that both will do well.
