Gold Stocks Underperform as Prices Dip Near Year End

By Staff Writer / January 01, 2022 / Article Link

After a month of trying to break through the support line of $1,800, gold continues to go sideways following the recent declines. Multiple factors are at play here, including a strengthening U.S. dollar, volatile stock prices and new variants of a mutating COVID virus, among other factors.

For the time being, the biggest winners seem to be pharmaceutical stocks and cryptocurrencies, although volatility there is also extremely high. Gold prices are showing continued consolidation as they trade slightly below the $1,800 price level, this week.

Gold prices initially reacted positively to news about the new Omicron variant. In Tuesday’s trading session, gold shot above the key $1,800 mark. Fears for a delayed economic recovery and prolong global supply chain disruptions are fuelling inflation worries. Consecutively, this is driving investors towards safe haven assets such as precious metals and mining stocks.

At this stage, it is too early to make long-term projections but many analysts are pointing to similarities between gold’s price action over the past week and the first wave of the pandemic in April 2020. Prudent investors are holding off to see what new information scientists will discover about the new COVID-19 variant, including how resistant it is to vaccines and how more transmissible it is than the previous variants. This will determine if a new lockdown will plunge recovering industries into a new wave of supply chain disruptions and loss of business.

On the upside, the overall negative sentiment has contributed to some of the most attractive valuations in more than five years. As the majority of miners are trading at a discount to net asset value, there is plenty of room for mining stocks to outperform over the coming year.

One approach that investors adopt in times of market volatility is diversifying their portfolio with mining stocks with different production profiles. These may be junior gold miners, mid-tier and large producers. For example, Agnico Eagle (AEM), Barrick Gold (GOLD), and Alamos Gold (AGI) produce 3.4 million, 5 million, and 500,000 ounces per annum respectively. These gold stocks are currently among the most popular for various reasons. Strong management teams and proven track records in dividend pay-outs and project expansion are among them.

Agnico Eagle’s major merger with Kirkland Lake Gold combined two of the best companies sector-wide into a massive Canadian gold producer. The gold miner’s stock is currently trading below 1.0x P/NAV, which is a dirt-cheap valuation for a producer of its size given that more than 95% of gold production coming from Tier-1 jurisdictions.

Barrick continues to have tremendous exploration success and production growth at Goldrush/Fourmile in Nevada and a large tailings/throughput expansion on deck at Pueblo Viejo. Being the 2nd largest producer globally, Barrick is trading near $18.00 per share and at just 16x trailing earnings.

Alamos Gold has expressed plans to grow production by 50% over the next four years. The main pillar of this growth will be focused on Island Phase III, a ~240,000-ounce producer with sub $650/oz all-in sustaining costs. A recent cut to its FY2021 production guidance led to a drop in this mining stock, which is currently trading at $7.25. With these stocks sitting at their cheapest levels in years, they are a steal at current prices.