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.
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.