Gold Stocks have pulled back 40% from their April highs as measured by the GDX, gold miner ETF. Markets are assuming inflation has peaked and will come down to reasonable levels. The combination of possible recession and the Fed’s quantitative tightening has lead markets to assume inflation will be brought under control. We believe it is unlikely that the runaway inflation can be brought down to 2-3% in the short term.
If inflation is more persistent than the market currently believes gold and gold stocks should do well. From a valuation stand point, Gold stocks have never been cheaper on a PE, Price to Cashflow, Price to Free Cashflow, or Dividend Yield. Quantitative tightening could be a wildcard, it remains to be seen how quickly it will be executed and how effectively it will tackle inflation. If you remember, the Fed has increased its balance sheet by 11x over the last decade leading to a situation in which there is a huge influx of cash into real estate, stock, and crypto markets. To a large extent, gold has been left out of this Fed-sponsored gravy train. However the weaponization of the dollar as the global reserve currency, is causing some countries to reduce dollar reserves and increase gold holdings. This should be positive for the price of gold over time.
Our favorites follow: Gold Fields International (GFI) has a 3.6% Yield. The proposed acquisition of Yamana Gold (AUY) at a premium caused the price to fall. GFI looks attractively valued with a nice yield and significant upside as the Yamana deals closes. Yamana stock gives investors an extra 10% potential upside for buying into the merger. Yamana stock will be exchanged into 0.60 shares of GFI. The risk is you will not be getting a big dividend until the transaction closes (should it be approved) and if the deal falls through Yamana stock will fall and GFI will most likely rally. We have a report on it here.
B2Gold (BTG) has an estimated yield of 4%. This Midcap stock flies under the radar of mainstream coverage. Solid cash flows, and significant expansion opportunities with some of the lowest all-in sustaining costs in the sector.