Why Gold Stocks Are Breaking Out to 6-Year Highs on Big Volume
The litany of negatives keeps on coming. With the Chinese devaluing their currency, we could be in for a battle that could be rough for President Trump. The Chinese renminbi traded in mainland China on Monday at roughly 7.02 to the dollar, compared with about 6.88 late on Friday. A higher number represents a weaker currency. The last time China’s currency was weaker than 7.00 to the dollar was in 2008, and this may only escalate the Federal Reserve into a more aggressive easing cycle.
The currency saber-rattling, along with Hong Kong protests, continued Iranian belligerence and increasing overall geopolitical instability, is causing market volatility to jump. With August often being the most volatile month of the year, we could be in dangerous waters.
One investment idea is also a safe harbor in times like this, and with gold breaking out to six-year highs, it makes sense perhaps to add some to portfolios now in case trends continue on the current path. We screened the Merrill Lynch research database for gold stocks rated Buy and found three that look like solid plays now.
Agnico Eagle Mines
This is one of Wall Street’s most preferred U.S. gold producers. Agnico Eagle Mines Ltd. (NYSE: AEM) is a senior Canadian gold mining company that has produced precious metals since 1957. Its eight mines are located in Canada, Finland and Mexico, with exploration and development activities in each of these regions, as well as in the United States and Sweden.
The company and its shareholders have full exposure to gold prices due to its long-standing policy of no forward gold sales. Agnico Eagle has declared a cash dividend every year since 1983.
The Merrill team loves the stock and noted this recently when the company posted solid second-quarter results:
Agnico Eagle reported a solid second quarter earnings beat of $0.10 with production higher and costs lower; LaRonde drove the output beat. We and consensus were at second quarter consensus of $0.03 and $0.04, respectively. The positive adjusted EPS variance versus us was due to commercial production of 383,000 ounces that was 6% higher.
Shareholders receive a small 0.89% dividend. The Merrill price target for the stock is $64, and the Wall Street consensus target is $60.09. The stock closed trading on Monday at $56.24, up almost 4% on the day.
This off-the-radar play offers numerous ways for investors to make money. Franco-Nevada Inc. (NYSE: FNV) is a resource sector royalty and investment company that was formed to acquire an established portfolio of mining, oil and natural gas royalties and certain equity interests. The royalty assets were spun out of Newmont Mining.
The royalty portfolio represents over two decades of acquisitions by Newmont and the old Franco-Nevada, which Newmont acquired in 2002. Franco-Nevada intends to grow through the advancement of existing properties and through acquisitions and investments.
The company posted solid fiscal first-quarter results, and the Merrill analysts said this at the time:
The company reported first quarter EPS of $0.35, well above us and consensus both at $0.28 due to stronger contributions from certain assets. Franco-Nevada maintained 2019 guidance. Pierre Lassonde will retire as Chairman of the company at the next AGM in May 2020. The company hiked its quarterly dividend from $0.24 to $0.25/share, the 12th consecutive year of dividend increases.
Investors receive a 1.10% dividend. Merrill has set its price target at $96.50, which compares with the $81.27 consensus target. The shares were last seen trading at $90.67 apiece.
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 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, the Lundin Mining Zinkgruvan mine in Sweden, and Glencore’s Antamina and Yauliyacu mines in Peru, then sells the silver and gold into the open market.
Last December, the company announced it had reached a favorable settlement with the Canada Revenue Agency with respect to the 2005 to 2010 tax years. Wheaton now anticipates that there will be no additional cash taxes for the 2010 to 2025 taxation years for its international subsidiary. This tax case had depressed the valuation and should help the shares continue to move higher.
The dividend yield is 1.36%. The $33.50 Merrill price target is higher than the $31.09 consensus target. The stock closed most recently at $26.43 a share.
Proper asset allocation should always include at least a single-digit percentage holding of precious metals like gold and silver. Not only do they hedge inflation over the long term, but they can also really help if the market does go into correction or bear market mode, as they tend to trade inverse to the markets.