It is all but a given that the Federal Reserve will raise the federal funds rate by 25 basis points, or one-quarter of 1%. It is also thought that over the course of 2018, the Fed will raise it three more times, and some are now saying perhaps even four times.
The goal of the increases is to get rates back to more normal levels and to choke off any potential spike in inflation. With the economy finally perking up, and consumer confidence soaring, you can bet that the probable rate hikes for 2018 are in the cards.
One very interesting trend over the past few years is the price of gold spiking when the Federal Reserve raises rates. RBC analysts have spotted this activity and noted this in a new research report:
Following the Fed rate hikes in December 2015 and 2016, the gold price rallied 15% and 8%, respectively, over the subsequent three-month period. We have also seen a strengthening in gold price following the most recent Fed rate hikes in March and June this year by 3% and 5%, respectively, over the same period. Our RBC Economics team currently anticipates another Fed rate hike to be announced at the upcoming FOMC meeting on December 13, 2017, which in our view could present a buying opportunity for investors on any share price weakness.
RBC is one of the better Wall Street firms when it comes to covering precious metals, so we screened its coverage universe and found four stocks it rates at Buy that may be outstanding buys now.
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Goldcorp
This top company with a solid balance sheet makes sense for investors to consider. Goldcorp Inc. (NYSE: GG) engages in the acquisition, exploration, development and operation of precious metal properties in Canada, the United States, Mexico and Central and South America. It primarily explores for gold, silver, copper, lead and zinc deposits.
Goldcorp’s principal mining properties include the Red Lake, Éléonore, Porcupine and Musselwhite gold mines in Canada; the Peñasquito and Los Filos mines in Mexico; the Marlin property in Guatemala; the Cerro Negro and Alumbrera mines in Argentina; and the Pueblo Viejo mine in the Dominican Republic.
Some Wall Street analysts feel that the company deserves a premium valuation to its peers due to its excellent balance sheet, growth profile with lower cost new mines, longer average mine life and a solid dividend yield. Over the past few years, Goldcorp has been altering its mine plans, cutting spending and disposing assets in order to reduce costs and focus on the most profitable production.
Goldcorp reported earnings for the third quarter that were in line with the Wall Street consensus. The company maintained its 2017 operating guidance and highlighted solid progress at achieving its 20-20-20 strategy. Goldcorp also bumped up reserves 26% to 53.5 million ounces with increases from Century of 4.7 million ounces and Cerro Casale and Caspiche providing 13.3 million ounces.
Goldcorp shareholders are paid a small 0.61% dividend. The RBC price target for the shares is $17, and the Wall Street consensus target is $17.25. The shares closed Tuesday’s trading at $11.76 apiece.
Kinross Gold
More aggressive investors may want to consider this smaller cap company. Kinross Gold Corp. (NYSE: KGC) engages in the acquisition, exploration, development and production of gold properties. The company’s gold production and exploration activities are carried out principally in Canada, the United States, the Russian Federation, Brazil, Chile, Ghana and Mauritania. It also produces and sells silver.
Kinross recently announced that it will proceed with the Tasiast Phase Two and Round Mountain Project W projects. At full production by 2020, CEO Paul Rollinson sees these two projects stabilizing the company’s gold equivalent output in the 2.5 million ounce range. Trading at a discount to the peer producers, some believe that this valuation gap could be closed due to these projects.
RBC has a $5.50 price objective on the stock. That compares to the posted consensus target of $5.31 a share. The stock closed most recently at $3.80 per share.
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Royal Gold
This is a solid stock for investors looking for a gold presence with somewhat less risk. Royal Gold Inc. (NASDAQ: RGLD) is a precious metals royalty and stream company engaged in the acquisition and management of precious metal royalties, streams and similar production-based interests. The company owns interests on 193 properties on six continents, including interests on 38 producing mines and 24 development stage projects.
Many on Wall Street feel that the company is very undervalued when compared to its sector peers. Backed by three new or expanding assets, Royal Gold’s revenue could grow by 13% to nearly $500 million by fiscal 2019. Royal Gold’s strong liquidity position also means it can compete for royalty and stream acquisitions.
For first quarter of fiscal 2018, the company reported earnings per share that were better and expected. The revenue figure was helped by several assets that performed better than expected. Thanks to strong free cash flow and $800 million available under its revolver, Royal Gold has the liquidity to pursue new deals.
Royal Gold investors receive a $1.10% dividend. The $95 RBC price target compares with the posted consensus target of $93.63. The stock was last seen trading at $83.43 a share.
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Wheaton Precious Metals
This is another precious metals stock that makes good sense for more conservative accounts looking for exposure to the sector. Wheaton Precious Metals Corp. (NYSE: WPM) is a Canadian precious metals streaming company with approximately 60% of its revenues from the sale of silver and 40% from gold.
Under the terms of long-term contracts, the company purchases silver and gold from a variety of mines, including Goldcorp’s Penasquito mine in Mexico, Vale’s Salobo mine in Brazil, Lundin Mining’s Zinkgruvan mine in Sweden and Glencore’s Antamina and Yauliyacu mines in Peru, then sells the silver and gold into the open market.
Shareholders are paid a 1.73% dividend. RBC has set its price target at $25. The consensus target was last seen at $25.86. The shares closed trading on Tuesday at $20.88.
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Proper asset allocation should always include a single-digit percentage holding of precious metals like gold and silver. Not only do they hedge over the long term, they can really help if the market does go in to correction or bear market mode, as they tend to trade inverse to markets.
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