I don’t know if you noticed, but Christmas season started early this year.
I walked into Whole Foods in early November, and I heard something that stopped me dead in my tracks…
The moon is right…
The spirits up…
We’re here tonight…
And that’s enough…
Simply having a wonderful Christmastime
Christmas music. A full 3 1/2 weeks before Thanksgiving… Are you kidding me, Whole Foods?
In any normal year, that would drive me up a wall. But with 2020 to 2021 potentially being the worst years on record for many, I kind of get it… People just want something to look forward to. So I put it out of my mind and went about my business.
It got me thinking, however…
Although most people I know think it’s almost sacrilegious to make any reference to Christmas before Thanksgiving — much less start in on the carols — there was always one exception when we were kids…
And though I’m no longer a kid, what if I put together my own list of the top 5 gold stocks for Christmas 2021?
Unbridled Avarice Versus Bargain Shopping
When I was growing up in the 1980s, the centerpiece of any solid list for Santa was always sourced from one of a handful of holiday retail catalogs.
Despite the complaining we hear these days about Christmas marketing creeping further into November, these suckers showed up in our mailboxes by late August.
For me, it offset the humdrum of back-to-school season by offering a glimpse of something to which I could look forward.
The Sears Wish Book, JCPenney Christmas Catalog, Montgomery Ward’s — many of which have been scanned and compiled on this website — any one of them could provide an endless stream of dreams and schemes, all fueled by hopes of a successful sales pitch to mom and dad.
Much like Ralphie and his brother in the movie “A Christmas Story,” my brother and I would dive into the catalog filled with “desire and the ecstasy of unbridled avarice” only to put together a list resembling a small novel.
And although time marches on, some things don’t change… My 6-year-old daughter is doing the same thing to me with the newest “American Girl” catalog.
If any of you have young daughters, then you know I’m in trouble… because that stuff is expensive.
So much so that I have been scrolling through their website, looking for anything on the Christmas list that has a coupon or is otherwise being discontinued — as those are generally sold as less expensive closeouts.
And that reminded me of a presentation I gave a long time ago with legendary resource speculator Rick Rule. In it, as per our usual arrangement, I talked mostly about markets and he talked mostly about investing philosophy.
And one comment he made — which always gets a big laugh — is that men always need to ask their wives for investing advice. Why, you ask?
Because they know that the best time to buy things…
Is when they’re on sale.
So let’s clip some coupons.
Gold Correction Puts Mining Companies on the Sale Rack
As investors have flocked to risk assets in the wake of vaccine pump after vaccine pump, they have mostly rotated out of one of the best performing asset classes of last year — gold.
However, that trend has been reversing of late, and the yellow metal has been making higher highs and higher lows for a couple of months.
Wednesday, it once again broke through resistance at $1,800 an ounce. And if successful, could knock on the door of its November high around $1,870.
Source: Bloomberg
While testing that recent high would still represent a negative return for the year, there are some reasons to be optimistic about gold’s prospects in 2022.
First off, this cycle of inflation has peaked, and commodities are beginning to dis-inflate off of their highs.
Source: Bloomberg
As those prices continue to correct, those producers make less money.
And unless there’s a last-minute deal before New Year’s, the Child Care Tax Credit will come to an end, which will reduce government spending.
Combining those means two key components of the GDP equation — Consumer + Investment + Government + (Exports-Imports) — will decline in early 2022.
Under those circumstances — declining inflation and GDP growth — gold tends to work well as an asset class, with an average expected return of 2.77% versus commodities at minus 1.6%, or tech at minus 1.29%.
Source: Fortune Research
Because tech is affected, the broader market won’t fare well during this period, and government actors will be forced to be accommodative.
Given the Fed’s double-barreled monetary response in 2020, and that President Joe Biden’s Treasury Secretary is former Federal Reserve Chair Janet Yellen, I suppose such accommodation will likely come in the form of good, old-fashioned money printing.
Whether they respond as strongly or not, gold is set to benefit.
And that is music to the ears of gold miners, as they have been beaten down over the course of the year.
This provides us an opportunity to look through the sector… to see what’s going on sale.
And just like I used to do when I was a kid, I’m going to make a Christmas list of my top 5 gold stocks…
Top 5 Gold Stocks for My 2021 Christmas List
One way to approach the market would simply be to look at the largest producers first. The data from the list below — although not exhaustive — I quickly pulled from Bloomberg.
Source: Bloomberg
You might find it interesting that when I pull a few of those top producers into a single chart, they’re all pretty much shaped the same.
Source: Bloomberg
In short, the larger companies tend to move alongside gold prices, usually making larger movements on a percentage basis than gold itself. That volatility in relation to the underlying commodity means major miners have a larger beta than that of a gold ETF, for example.
Honestly, any of these gold stocks would serve just fine, as they’re all set to make fantastic margins even if gold pulls back as discussed. But a quick look at their costs can tell us which is making the biggest margins.
Source: Bloomberg
Now the first one is a data aggregation error of some sort, as I know for a fact that Harmony Gold Mining Co. (NYSE: HMY)’s costs exceed $1,000 per ounce. But the others look correct at a glance.
The rest of these companies down through Golden Star Resources Ltd. (NYSEAmerican: GSS) are making money hand over fist, even in the event of a gold price correction down to $1,650.
The risk that remains in these operations comes down to where the operations are. In an uncertain economic environment, I stick mostly to size, and to predictable jurisdictions like the Americas and Australia.
For example, although Alacer’s mine is one of the lower-cost operations on this list, it is located in Turkey. If I have a choice, I’d prefer not to have much exposure there simply because of the country’s financial instability, which I wrote about more than a year ago.
Similarly, Centerra’s operations are located in Kyrgyzstan and Mongolia, which are a little too close to China for my liking.
But the two largest producers, Newmont Corp. (NYSE: NEM) and Barrick Gold Corp. (NYSE: GOLD), are still crushing it despite increasing costs and decreasing prices.
In both Q3 and Q4 of 2020, the mining behemoths generated over $1 billion apiece in cash flow.
Source: Bloomberg, Fortune Research
And even after a difficult Q2, they bounced back to post Q3 revenues around $400 million.
In other words, these mining companies should now be going way up… not down.
Even better, other than Barrick Gold’s Porgera mine in Papua New Guinea and Newmont’s assets in Ghana, almost all of their operations are in countries with little jurisdictional risk.
As such, they’re a good couple of names to start our Christmas list with.
I’m interested in both, right around the halfway points of their most recent runs… That means Barrick below $18 and Newmont below $58.
Source: Bloomberg
Source: Bloomberg
In the next tier of cash-flow machines, Kinross has some jurisdictional risk, as a significant part of its production comes from two mines in Russia — Kupol and Dvoinoye.
But Agnico Eagle Mines Ltd. (NYSE: AEM) and Kirkland Lake Gold Ltd. (NYSE: KL) both operate in friendly areas and have no debt to speak of.
Similar to Barrick and Newmont, I like each of them below the halfway point of this year’s run… That means below $52 and $41 per share, respectively.
Source: Bloomberg
Source: Bloomberg
And finally, for those interested in taking on a little bit of jurisdictional risk, there’s Mali-based B2Gold Corp. (NYSEAmerican: BTG). Its Fekola mine is a fantastic operation. Even better, it expanded capacity by 25% last year.
Cash flow has been rising from that mine for years, and with 2021 production now expected to come in at over a million ounces at an all-in cost of under $800, it’s hard to pass up here below the $3.85 per share mark.
Source: Bloomberg
That should at least bring it back to pre-virus highs around $4.50, which is still a solid value considering most analyst price targets are in the $5 to $9 per share range.
Source: Bloomberg
There are others on the Christmas 2021 list worthy of consideration, too…
I thought Yamana Gold Inc. (NYSE: AUY) was under-loved during last year’s rally.
Endeavor Mining completed its merger with Teranga Gold earlier this year, creating a new senior producer.
And Equinox Gold Corp. (NYSEAmerican: EQX) — chaired by no less a legend than the great Ross Beaty — acquired Leagold last year and doubled its production profile. Ross himself just picked up shares in August at around the $6 mark (on U.S. exchanges), which was an absolute steal.
But I’ll leave adding to this list of my top 5 gold stocks for another day.
In the meantime, I have to check and see if my daughter is behaving… If she’s not, I’m not adding to her list either!
All the best,
Matt Warder
Fortune Research
