The “barbarous relic” is having its revenge.
That dismissive characterization of gold was made by the economist John Maynard Keynes. The metal has had many skeptics, including Warren Buffett, who once said that gold produces nothing and merely “looks back at you.”
But gold’s surge is refuting its critics. The metal gained 4% in the past week, to a record $1,971 an ounce—topping the 2011 peak of $1,900. Gold’s rally reflects the dollar’s weakness, ultralow interest rates globally, and record demand from exchange-traded funds like the
SPDR Gold Shares
(ticker: GLD), the leading gold ETF. Gold is now up 30% this year, making it one of the strongest major asset classes.
There could be more room for gold—and gold-mining stocks—to advance, with inflation-adjusted U.S. rates negative and the U.S. government running enormous deficits.
One of gold’s major attractions is that it’s hard to make more of it, unlike the dollar and other paper currencies. Newly mined metal adds less than 2% each year to the roughly six billion ounces currently in the world.
“Gold is in a secular bull market and still has a long way to run,” says Joe Foster, a manager of the Van Eck International Investors Gold fund (INIVX). “Sooner or later, gold will break above $2,000 an ounce and move to higher levels.”
The many ways to play gold include ETFs like the SPDR Gold Shares and the lower-fee
iShares Gold Trust
(IAU), as well as mining-stock ETFs led by the
VanEck Vectors Gold Miners
ETF (GDX) and the more-speculative
VanEck Vectors Junior Gold Miners
(GOLD) are the top gold miners, with market values above $50 billion, mines on several continents, solid balance sheets, strong management, ample free cash flow, and all-in production costs around $1,000 an ounce.
Mutual funds include the $1 billion VanEck International Investors Gold, Fidelity Select Gold (FSAGX), and ASA Gold and Precious Metals (ASA), a 62-year-old closed-end fund that trades around $23, a 10% discount to its net asset value.
Foster views gold as a financial asset that acts as an alternative to the dollar, which fell 4% in July, as measured by the U.S. Dollar Index.
“We have long maintained that gold is the currency of last resort, particularly in an environment like the current one, where governments are debasing their fiat currencies and pushing real interest rates to all-time lows,” write Goldman Sachs commodity analyst Jeffrey Currie and his colleagues. The firm has lifted its 12-month gold price target to $2,300 an ounce and warns about the durability of the dollar as the world’s reserve currency.
Gold yields nothing, but tends to do well when inflation-adjusted rates are low or negative, as they are now. Long a haven, it also offers portfolio diversification, although many investors have little or no exposure. A UBS survey of family offices last year found an average gold and precious metal exposure of just 3%.
Data as of 7/29/20
Barron’s has been bullish on gold, including a cover story in 2018, when the metal traded around $1,200.
Demand from exchange-traded funds has been a big driver for gold this year. Bloomberg calculated total gold ETF holdings at nearly 108 million ounces late last week, up 4% in July and 30% above the 83 million ounces at year-end 2019. The SPDR Gold Shares ETF hit nearly 40 million ounces recently.
The mining stocks offer leverage to gold’s price, with profit rising faster than the metal in bull markets. Newmont estimates that its free cash flow rises by $400 million annually for each $100 gain in gold off a base of $1 billion at $1,200 an ounce This implies yearly free cash flow of about $4 billion at current prices, or a 7% free cash flow yield. Both Newmont and Barrick are highly profitable at today’s prices.
Neither is a growth story, however. Both forecast little change in production in the current decade, with Newmont at roughly six million ounces a year, and Barrick, five million.
“You don’t buy Newmont and Barrick for growth,” Foster says. “You buy them for controlling costs, expanding margins, and increasingly their dividends significantly.”
Newmont, at a recent $69, was yielding 1.5%; Barrick, at $29, 1%.
Foster holds both and likes
(BTG), a midtier Canadian miner trading around $7 that is more of a growth story. It has about one million ounces of production and is developing a Colombian mine that could add 20% to annual output. B2Gold is also expanding a mine in Mali.
Investors might be reluctant to rush into gold or mining stocks. But in a world of persistently low interest rates, the sector seems poised to extend its gains.
Read More: What Does a Rally in Gold Mean for Stocks?
Write to Andrew Bary at firstname.lastname@example.org