Stocks ended Friday mixed as both the S&P 500 and Dow Jones Industrial Average ended the day in negative territory, while tech stocks pared losses to finish the week. Investors are still digesting yesterday’s sharp sell-off in both the stock and bond markets. While all three indexes posted positive gains for the month, the Nasdaq posted its worst weekly loss since October.
Inflation is on every investor’s mind, which is why we are seeing Treasury yields rising. Gold has also been trending down as of late, but I believe that will change soon. And when it does, I think it will drive up prices for gold mining stocks such as Barrick Gold Corporation (GOLD), Newmont Corp. (NEM), and Kinross Gold Corporation (KGC).
Before I tell you why I believe why now is a great opportunity to invest in gold, let’s take a more in-depth look at how the market has performed over the past week.
This week has been a wake-up call for investors. We saw a surge in bond yields that led to a sell-off in both treasuries and stocks Thursday. The yield on the 10-year note briefly soared above 1.6%, its highest level in twelve months. This created weakness in growth stocks, especially the Nasdaq, as it plummeted 3.5%, its worst day since October.
The rise in rates was likely due to many factors, including improving economic outlook, rising inflation concerns, and a historically weak 7-year Treasury note auction. Treasuries stabilized today with the 10-year note finishing with a 1.4% yield, but the S&P 500 and Dow Jones were still negative on the day. The Nasdaq was able to rebound for a 0.5% gain.
As we’ve seen over the past few months, the stock market is rallying on the expectation for a robust economic recovery. Add to this the expected $1.9 trillion relief bill, an extremely low Fed rate, and an expanding Federal balance sheet, and you have all ingredients for inflation.
Gold has historically risen in inflationary periods, but that hasn’t been the case so far. In fact, gold just posted its worst monthly loss since 2016. What’s going on?
The belief is that investors are concerned that the Federal Reserve will raise rates to combat this expected inflation. But I think they’re wrong. The Fed has all but written in the sky that they have no intention of raising rates until next year or the year after.
I believe that at some point, in the not too distant future, the Fed will reassure the markets that it won’t be raising rates anytime soon and signal that it might take measures to keep yields down. When an announcement like this is made, gold prices should rally significantly.
However, until this happens, yield prices might continue to rise, and if that happens, gold could continue to fall.
Also, with both the Fed increasing their balance sheet and more fiscal stimulus, we will continue to increase our massive debt. I see this as a significant positive for gold prices, as high debt levels have shown a strong correlation with higher gold prices. This is why I am recommending my three top gold mining stocks below.
Barrick Gold Corporation (GOLD)
GOLD is one of the world’s largest gold producers, operating mines in North America, South America, Australia, and Africa. The company had a great 2020 with a record free cash flow of $3.4 billion, achieving zero net debt and increasing gold resources year over year. The company has also been able to improve its balance sheet as well.
The company should gain on its new management team’s ability to extract significant value from its vast portfolio of assets. A focus on the highest-quality mines should generate more free cash flow per share. In addition, GOLD will also benefit from higher gold prices and its recent Nevada joint venture with NEM.
The stock has an overall grade of B, translating into a Buy Rating in our POWR Ratings. The company also has a Value Grade of B, indicating that the stock is trading below its value. This is confirmed with a trailing P/E of 11.57 and a forward P/E of 13.33. GOLD also has a Quality Grade of B as its current ratio is quite high at 4.5. We also grade GOLD based on Growth, Momentum, Stability, and Sentiment, which you can find here.
GOLD is the #17 ranked stock in the A-rated Miners – Gold industry. You can find other top stocks in that industry by clicking here.
Newmont Corp. (NEM)
NEM is the world’s largest gold producer. The company also produces its fair share of copper. It has a healthy balance sheet, strong free cash flow, and an impressive pipeline of production projects. Its joint venture with Barrick Gold will benefit not only that company but NEM as well. The joint venture is expected to generate $500 million in synergies.
The company’s acquisition of Goldcorp should also increase cash flow as NEM is poised to unlock value at many of Goldcorp’s assets. It should also gain from projects such as the Tanami expansion, Yanacocha Sulfides, and Ahafo north.
NEM is rated a Buy in our POWR Ratings system. Like GOLD, NEM has a Value Grade and Quality Grade of B. NEM is currently underpriced with a forward P/E of 15.29 and an EV/EBITDA of 7.9. The company has $5.8 billion in cash as of the most recent quarter, compared to only $551 million in short-term debt. For NEM’s other grades (Growth, Value, Momentum, Stability, and Sentiment), click here.
NEM is ranked #14 in the same A-rated industry as GOLD.
Kinross Gold Corporation (KGC)
While not as big as GOLD or NEM, KGC is no slouch. The company operates mines and focuses its greenfield and brownfield exploration in the Americas, West Africa, and Russia. KGC has delivered value to its shareholders due to its status as a low-cost gold producer. In its most recent quarter, the company had record gold output.
The company was able to expand its U.S. production by acquiring assets from GOLD. KGC has even been able to extract more output from these assets. It should see further growth from development projects, expanded production at its existing mines, and extending the life of its older mines. Future growth should come from its Tasiast mine, which has a large gold deposit.
KGC has a grade of B, or Buy rating in our POWR Ratings system. It has a Value Grade of B, which makes it an attractive stock. With a trailing P/E of 6.17. it even has a more attractive valuation than GOLD and NEM. According to the StockNews Price Target feature, the stock has an absurd 89.43% upside potential based on its average price target.
The company also has a Quality Grade of B, with $1.2 billion in cash and total liquidity of $2.8 billion as of the end of last year. You can check out KGC’s other grades (Growth, Momentum, Stability, and Sentiment) by clicking here. KGC is ranked #10 in the A-rated Miners-Gold industry.
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GOLD shares . Year-to-date, GOLD has declined -18.04%, versus a 1.73% rise in the benchmark S&P 500 index during the same period.
About the Author: David Cohne
David Cohne has 20 years of experience as an investment analyst and writer. He is the Chief Value Strategist for StockNews.com and the editor of POWR Value newsletter. Prior to StockNews, David spent eleven years as a consultant providing outsourced investment research and content to financial services companies, hedge funds, and online publications. David enjoys researching and writing about stocks and the markets. He takes a fundamental quantitative approach in evaluating stocks for readers. More…
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