Commodities & Metals

Gold Could Shatter Records If the Coronavirus Threat Turns Into a Pandemic

Lee Jackson

Many people will argue, and rightfully so, that the coronavirus situation is just another in a long litany of the “world is doomed” health scares, and with good reason. They said the same thing about the West Nile virus in 2002, SARS in 2004, bird flu in 2005, swine flu in 2009, Ebola in 2014 and Zika in 2016.

A pandemic is the worldwide spread of a new disease. An influenza pandemic occurs when a new influenza virus emerges and spreads around the world, and most people do not have immunity. Viruses that have caused past pandemics typically originated from animal influenza viruses.

However, there is always the chance that the current coronavirus outbreaks are a pandemic, and if so, one asset class could explode much higher if it is. While gold traded to seven-year highs recently, the top could get blown off if things get serious. In fact, some on Wall Street feel the precious metal could soar to as high as $2,100 an ounce near term, or even to $2,600 an ounce if the worst-case scenarios come into play.

Gold dropped a stunning 5% last Friday, the biggest drop in seven years despite continued massive demand. Top Wall Street traders and analysts attributed the plunge to forced selling aimed at offsetting losses elsewhere and also to covering margin calls. The sell-off also provides a much better entry point for nervous investors who have been looking to add gold but have waited after big price moves already posted over the past year.

In addition, other issues are in play that could help support gold prices in a big way, and in a recent Deutsche Bank report noted this:

We expect gold prices to derive more enduring support from accommodative monetary policy worldwide, a shrinking pool of risk-free assets, and lower beta of traditional risk-off currencies, than from the coronavirus epidemic given a still-low probability of the most disruptive scenario. While the upside for gold may appear nearly unlimited given its historical relationship to CPI, PPI and other asset prices, scenarios suggest the disruption to global growth and financial markets will have to be extreme indeed in order for gold prices to reach new highs in asset-price ratios. USD – $2600 per ounce.

Given the massive volatility, and stock market massacre last week, it probably still makes sense for worried investors to add some gold to their portfolios. One way to hedge a continued sell-off would be to buy gold, and while the SPDR Gold Shares (NYSE: GLD) is an outstanding vehicle, as you literally buy physical gold, investors may want to invest in some of the top miners and royalty companies. We screened the Merrill Lynch precious minerals universe looking for companies rated Buy and found five solid choices for investors.

Agnico Eagle Mines

This is one of Wall Street’s most preferred North American 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 company’s Meadowbank complex in Nunavutis is expected to achieve commercial production very soon, and the Amaruq project was expected to ramp up to full production by late last year. Amaruq’s gold output is forecast to rise from 130,000 ounces in 2019 to 351,000 ounces in 2021, and it could account for 17% of Agnico Eagle’s total output.

Shareholders receive just a 0.86% dividend. The Merrill Lynch price target on the shares is $62, and the Wall Street consensus target is in line at $62.04. Agnico Eagle Mines stock closed Friday’s trading at $47.53, down almost 4% on the day.

Barrick Gold

This is another top miner, and it is offering a very solid entry point. Barrick Gold Corp. (NYSE: GOLD) and Randgold Resources completed their merger on January 1, 2019, which created the world’s largest gold company in terms of production, reserves and market capitalization.

Last year, Barrick and Newmont created the Nevada Gold Mines joint venture, on a 61.5% to 38.5% basis, with Barrick as operator. The venture is targeting $450 million to $500 million in annual operational and other synergies over the next five years.

Barrick Gold recently reported adjusted earnings per share that were above Merrill Lynch and consensus expectations, in part due to lower interest expenses. For 2020, the company is forecasting for gold output of 4.8 million to 5.2 million ounces at total cash cost, and all-in sustaining costs of $650 to $700 and $920 to $970 per ounce, which was basically in line. The company lowered net debt by $0.9 billion quarter over quarter and hiked its quarterly dividend by 40% to $0.07 per share.

Merrill Lynch has a $22 price target, while the consensus target is $21.35. Barrick Gold stock closed Friday at $19.04 a share, down close to 4% on the day.