2023-03-14 08:30:00 ET
Summary
- We have been buying GOLD hand-over-fist.
- With the tumultuous market developments of the past few days, GOLD shares have taken off like a rocket.
- We share three reasons why we believe this may just be the beginning of a major bullish move for the stock and reiterate our Strong Buy rating.
We have been buying shares of Barrick Gold ( GOLD ) hand-over-fist lately as we view it as one of the most compelling risk-adjusted buys in the market today. With the tumultuous market developments of the past few days, this bullishness has been vindicated as GOLD shares have taken off like a rocket:
In this article, we share three reasons why we believe this may just be the beginning of a major bullish move for the stock and reiterate our Strong Buy rating.
Reason #1: Simmering Uncertainty Driving Flight To Gold
In just a few days, the US experienced the second and third biggest bank failures in history. Initially, Silicon Valley Bank ( SIVB ) faltered, followed quickly by Signature Bank ( SBNY ).
The suddenness of these events triggered apprehension in markets, with concerns arising among investors over the possibility of another banking crisis akin to that of 2008-2009.
This, combined with ever-rising geopolitical tensions between Russia and the West over Ukraine, Israeli Prime Minister Netanyahu warning that a horrible nuclear war with Iran could break out if Iran is not stopped from developing nuclear weapons, and of course China's and the U.S.'s accelerating collision course over Taiwan, are all driving investment dollars into safe havens like gold ( GLD ) and silver ( SLV ).
As a result, it is little wonder that mining stocks ( GDX ) and the price of the yellow and silver metals themselves soared in recent trading sessions, with GOLD outpacing them all:
Reason #2: The Fed May Very Well Pivot Soon
That said, the aforementioned banking crisis may very well provide another even stronger tailwind for precious metals and their miners in the not-too-distant future.
The major cracks and even serious fractures showing up in the United States' financial infrastructure over the past week in large part due to the Federal Reserve's aggressive interest rate hikes could very well shift the Federal Reserve Board's sentiment away from sustained aggressive rate hikes. As a result of this potential development, the two-year US Treasury yield experienced a substantial drop of a magnitude not seen in a single day since 1987. This reflects the market's belief that the Federal Reserve will not increase interest rates during its upcoming meeting later this month.
In fact, Goldman Sachs ( GS ) predicted:
"In light of recent stress in the banking system, we no longer expect the FOMC to deliver a rate hike at its March 22 meeting with considerable uncertainty about the path beyond March."
Moreover, Fed swaps now show that rate cuts are likely by the end of the year.
Why is this a big deal for gold prices? Well, history has shown that sustained periods of negative real interest rates are very bullish for gold. This is because during such periods, the purchasing power of cash is eroded faster than the risk-free yield being offered to save that cash. As a result, gold becomes a relatively more attractive option for storing wealth in a low-risk vehicle. Given that inflation remains elevated relative to historical norms, if the Fed is forced to pivot to at least some degree before the job is complete, it could signal to the market that negative real interest rates are here to stay and could very possibly send gold prices soaring higher.
Reason #3: Bullish Outlook For Copper
Finally, GOLD has tremendous long-term value accretion potential from its copper mining business, which currently provides around 18% of the company's revenue. However, this figure could double or more in the next 5-10 years due to several impressive copper projects in development, including Reko Diq and Lumwana Superpit in line with its stated aim to become the world's "Most Valued Gold and Copper Company."
Moreover, copper prices are expected to soar due to the multi-trillion dollar effort to decarbonize the global electricity grid, with annual copper demand predicted to double by 2035 and continue to grow until 2050. As a result, GOLD has a clear path to generating strong earnings and free cash flow growth in the coming decade and beyond.
Investor Takeaway
In our view, GOLD is a strong buy due to the near-term catalysts emerging for gold prices as well, its strong copper production growth runway, and the potential for long-term upside in copper prices.
On top of that, its valuation also remains among the most attractive in the sector on an EV/EBITDA basis, its dividend is among the highest in the sector as well (especially when including its special dividends that it often pays), and its share buybacks have been well-timed to reduce shares outstanding during dips in the stock price.
With some of the highest quality assets in the business, a phenomenal CEO who has a PhD in Geology that gives him deep industry-specific technical knowledge rather than merely being a businessman, and an attractively valued stock, there are more and more reasons to be bullish on GOLD here. As a result, it would not surprise us at all if this is the beginning of a strong run up in the stock over the coming weeks and months. We remain happily long shares and will likely add further on any dips.
For further details see:
Barrick Gold: The Bull Was Just Released