CA - Buy Alert: High Yield Gold Miners With Both Hands

2023-05-26 07:00:00 ET

Summary

• Gold mining stocks have been pummeled lately.
• We look at why and why we are bullish on gold miners right now.
• We also share some top high-yield picks in the sector.

Precious metals mining stocks ( GDX , GDXJ ) have been pummeled lately:

This sharp decline is due in large part to the pullback in gold ( GLD ) and silver ( SLV ) prices, to which miners have leveraged exposure:

Why are gold and silver prices - and by extension mining stocks - falling? There are likely three reasons:

• The first was likely profit taking. The precious metals sector had been on a pretty strong two-month bullish run into early May, with gold hovering near all-time highs. As a result, gold miners especially probably got a bit ahead of themselves with investor enthusiasm for the metal pushing them aggressively into mining stocks:

• Another major reason that the precious metals sector has been getting hammered lately is due to the fact that the two main catalysts for gold's strong run - uncertainty in the banking sector and concerns over a potential U.S. default - are dissipating. The banking sector seems to have stabilized and there are hints of progress in the U.S. debt ceiling talks.
• Last, but not least, resilient data continues to come out of the United States economy, reducing the probability for interest rate cuts later this year while also removing the impetus for investors to leave risk-on assets in favor of safe havens like gold.

That said, despite the highly negative sentiment on precious metals right now, we believe that now is an excellent opportunity to buy high yield miners hand-over-fist. Here are three reasons why:

Reason #1: Follow The Smart (Central Bank) Money

One of the biggest reasons to buy gold-related investments right now is simply that arguably the smartest money in the world - Central Bankers - is buying hold hand-over-fist.

In 2022, central bankers were net buyers of gold for the 13th consecutive year, driving overall gold demand up by 18%. Moreover, Q1 2023 data showed the central bank demand shattered the previous Q1 record by a whopping 34%, with strong demand from central banks in both developing and developed economies.

If central bankers are increasingly turning to gold, investors may want to consider doing so as well.

Reason #2: Long-Term Macro Trends Favor Precious Metals

Another major reason why the current dip is an excellent opportunity to add precious metals-related investments to your portfolio is that there are numerous long-term macro trends that favor doing so. Three of these include:

1. De-globalization: With accelerating decoupling between major economies such as China, Russia from the United States, Canada, Europe, Australia, South Korea, and Japan will likely contribute to higher inflation while also increasing geopolitical instability. Both high inflation and rising geopolitical instability tend to be tailwinds for gold prices.

2. Runaway spending and deficits: Governments, including the United States, are facing significant inflationary pressures due to excessive spending and deficits, preventing central banks from raising interest rates sufficiently to combat inflation effectively. This in turn will lead to a state of near perpetual negative real interest rates. History has shown that negative real interest rates are overwhelmingly bullish for gold prices.

3. Challenges to U.S. Dollar supremacy: The growing challenges to the dominance of the U.S. Dollar could drive global demand for gold as a replacement for reserves held in U.S. Dollars. As a result, gold will likely have a growing tailwind relative to the U.S. Dollar moving forward.

Reason #3: Valuations And Yields Are Mouthwatering

Last, but not least, thanks to the recent sell-off in the gold sector, there are several gold miners on sale right now that offer mouthwatering yields and attractive valuations.

For example, in the blue-chip miner space, Newmont Corporation ( NEM ) is now offering a 4% dividend yield alongside an EV/EBITDA ratio of just 6.37x relative to its five-year averages of 2.69% and 7.68x, respectively. With a very strong balance sheet , a portfolio of world-class gold mines located in top mining jurisdictions and increasing exposure to increasingly coveted high-quality copper assets, NEM offers investors very attractive current yield alongside considerable long-term price appreciation potential with fairly little risk.

In the junior mining space, Fortitude Gold Corporation ( FTCO ) offers investors a juicy 7% dividend yield (paid monthly) that is easily covered by earnings alongside a debt-free balance sheet . Moreover, with several highly attractive exploration and development sites in progress, investors could see massive stock price upside in the coming quarters and years.

Investor Takeaway

While gold miners seem to be in freefall at the moment, it is important to keep your eyes on the playing field instead of the scoreboard. Investors who do so will see that today is a great chance to load up on high yield, high-quality gold miners at mouthwatering valuations. Given the heavy buying by central bankers and the bullish long-term macro trends that seem nearly impossible to reverse at this point, you will likely thank yourself someday for buying gold miners hand-over-fist today.

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