Commodities & Metals

Why RBC Says to Hedge Current Market Volatility With Top Gold Stocks


If you thought the first quarter was rough, the start to the second quarter has been volatile as well. While it comes as no surprise that we may still be poised to test the February lows, the culprits driving the volatility continue to be the same: technology selling and worries over trade.

The bright spot for long-term investors is that the economy and the overall business outlook is very positive, and there is also a good chance that first-quarter earnings will be solid.

Most investors don’t have the ability to just move in and out of their portfolios, as commissions and tax implications make that virtually impossible. A new RBC research report makes the case that the best way to hedge now would be to own some gold stocks, and here’s why:

Gold has emerged as a short-term hedge against this volatility and we recommend investors add gold exposure especially with the equity valuations at multi year lows. We maintain our flat $1,300 per ounce gold and $17.50 per ounce silver assumptions while marking to market for the first quarter of 2018. The North American precious metal producers as a whole are trading at 0.98 times long-term net asset value versus the average level of 1.27 times since the start of 2015. The 23% discount is 2 standard deviations below the mean.

What that means in simpler terms is that the top gold stocks are cheap now and investors can take advantage of the discounts while hedging against further volatility and risk. We found five stocks rated Outperform that make sense now.

Barrick Gold

This stock is one of the top companies in the sector and it sold off recently, providing a solid entry point. Barrick Gold Corp. (NYSE: ABX) produced 5.32 million ounces of gold in 2017, making it the world’s largest gold producer. At year-end 2017, Barrick’s reserve position totaled 64 million ounces, one of the largest in the world. The company is in the midst of building three new development project, which will add nearly 1 million ounces of new output by 2023.

The company has worked hard over the past few years to deleverage the balance sheet, and asset optimizations and digitization have been implemented to lower costs. Through its large reserve base, a slew of development assets and no hedging, the company offers investors a big exposure to gold.

Investors receive just a 0.96% dividend. The RBC price target for the stock is $16, and the Wall Street consensus target is $16.03. Shares closed Wednesday at $12.52.


This top company with a solid balance sheet makes sense for investors to consider. Goldcorp Inc. (NYSE: GG) engages in the acquisition, exploration, development and operation of precious metal properties in Canada, the United States, Mexico and Central and South America. It primarily explores for gold, silver, copper, lead and zinc deposits.

Goldcorp’s principal mining properties include the Red Lake, Éléonore, Porcupine and Musselwhite gold mines in Canada; the Peñasquito and Los Filos mines in Mexico; the Marlin property in Guatemala; the Cerro Negro and Alumbrera mines in Argentina; and the Pueblo Viejo mine in the Dominican Republic.

Some Wall Street analysts feel that the company deserves a premium valuation to its peers due to its excellent balance sheet, growth profile with lower cost new mines, longer average mine life and a solid dividend yield. Over the past few years, Goldcorp has been altering its mine plans, cutting spending and disposing assets in order to reduce costs and focus on the most profitable production.

Shareholders receive a 0.58% dividend. RBC has a $17 price target, and the consensus target is $17.74. The shares closed Wednesday at $13.88.

Kinross Gold

More aggressive investors may want to consider this smaller cap company. Kinross Gold Corp. (NYSE: KGC) engages in the acquisition, exploration, development and production of gold properties. The company’s gold production and exploration activities are carried out principally in Canada, the United States, the Russian Federation, Brazil, Chile, Ghana and Mauritania. It also produces and sells silver.

Kinross announced last year that it will proceed with the Tasiast Phase Two and Round Mountain Project W projects. At full production by 2020, CEO Paul Rollinson sees these two projects stabilizing the company’s gold equivalent output in the 2.5 million ounce range. Trading at a discount to the peer producers, some believe that this valuation gap could be closed due to these projects.

The $5.50 RBC price objective compares to the $5.32 consensus target. Shares closed Wednesday at $3.94.

Royal Gold

This is a solid stock for investors looking for a gold presence with somewhat less risk. Royal Gold Inc. (NASDAQ: RGLD) is a precious metals royalty and stream company engaged in the acquisition and management of precious metal royalties, streams and similar production-based interests. The company owns interests on 193 properties on six continents, including interests on 38 producing mines and 24 development stage projects.

Many on Wall Street feel that the company is very undervalued when compared to its sector peers. Backed by three new or expanding assets, Royal Gold’s revenue could grow by 13% to nearly $500 million by fiscal 2019. Royal Gold’s strong liquidity position also means it can compete for royalty and stream acquisitions.

Fiscal second-quarter 2018 revenue was 7% higher year over year to $114.3 million, driven by Andacollo, the Wassa/Prestea stream and Rainy River. The company is improving its net debt and liquidity profile by focusing on paying down debt.

Shareholders receive a 1.16% dividend. RBC has set its price target at $95. The consensus target is $96.04, and shares closed Wednesday at $86.25.

Wheaton Precious Metals

This precious metals company makes good sense for more conservative accounts looking to have exposure to the sector. Wheaton Precious Metals Corp. (NYSE: WPM) is a Canadian based, precious metals streaming company with approximately 60% of its revenues from the sale of silver and 40% from gold.

Under the terms of long-term contracts, the company purchases silver and gold from a variety of mines, including Goldcorp’s Penasquito mine in Mexico, Vale’s Salobo mine in Brazil, Lundin Mining’s Zinkgruvan mine in Sweden, and Glencore’s Antamina and Yauliyacu mines in Peru, then sells the silver and gold into the open market.

At San Dimas, a change in ownership recently occurred (from Primero to First Majestic Silver) and the stream agreement was slightly revised so that the company now will receive 25% of gold production, in addition to 25% of silver production converted to gold at a fixed gold/silver exchange ratio of 70:1. Wheaton Precious Metals will pay First Majestic the lower of $600 per ounce or the prevailing market price.

Shareholders receive a 1.77% dividend. The RBC price target is $25. The consensus target is $26.22, and the stock closed at $20.29.

Proper asset allocation should always include a single-digit-percentage holding of precious metals like gold and silver. Not only do they hedge over the long term, they can really help if the market does go into correction or bear market mode, as they tend to trade inverse to markets.

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