The gold miners have been one of the best trades in the past year, and while chasing seems like a great way to punch your ticket to the next big major reversal, I’d argue that the gold bulls still have plenty of reasons to bet on the best miners, as they look to catch up to the massive move in gold prices.
Even if gold prices were to retreat slightly, let’s say to around US$5,000 per ounce, the gold miners still look fundamentally undervalued here, as they look to continue experiencing huge earnings and cash flow growth spurts. Of course, it’s pretty much impossible to tell what gold’s next big major move will be.
And who knows if the US$5,000 level will become a new floor as central banks across the globe continue to add to their reserves over time.
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The case for the miners as gold prices fluctuate
While some view gold and silver as speculative assets (they don’t generate cash flow, after all, and move based on what someone else is willing to pay), I like to think of them as a great hedge for a number of things. Whether we’re talking about a currency debasement, a rapid devaluation of the U.S. dollar, lingering high levels of inflation, or an equity market shock, the asset might just have your back when other asset classes don’t.
If you buy that gold can reach US$6,000 per ounce at some point over the next year or two, or even if you think gold can steady in its current range (just north of the US$5,000 mark), I’d argue that the gold miners still look like a great deal. Indeed, it might take a move back to the US$4,500 level for some of the miners to look fully valued. And while such a decline isn’t outside of the realm of possibility, I would consider the miners to be an intriguing group to watch, especially if more investors warm up to the commodity as a part of a diversified portfolio.
Either way, gold seems more like a momentum asset, even after the latest pullback, than something that’s undervalued. You can’t really “value” gold or any other precious metal as you would a stock.
Kinross Gold shine brighter than gold
In any case, I think sticking with value plays, like Kinross Gold (TSX: K), could be the way to go if you’re looking to maximize your margin of safety in the gold scene right now. Of course, even the cheapest miner might still have an amplified downside if gold suffers a big slide. That said, such a dip ought to be viewed as a chance to get more shares for less rather than a sign that gold has lost its lustre for good.
Corrections happen, and they’re a good thing after a heated run. I think there’s more to love about K stock than its very reasonable 11.0 times forward price-to-earnings (P/E) multiple. The $53.5 billion firm is raising its dividend quite quickly, with the most recent hike coming in at 14%. In the meantime, double-digit hikes are coming in faster as cash flow surges on the back of the strength in gold prices.
Until gold takes a dive, I’d expect more of the same for the coming year. With a robust balance sheet and money for mergers and acquisitions, K stock remains intriguing in this climate. Investors should keep tabs on cost controls, especially as energy prices and labour costs rise. Despite such potential pressures, though, it’s more about gold’s strength than anything else, at least for now. And for that reason, the gold miners are a productive, bountiful (and cheap) way to play an otherwise unproductive asset.
