It was asleep for years, just like volatility. But like all cycles that tend to repeat themselves, inflation is back, and it may be surging faster than you think. In fact, Treasury yields jumped to four-year highs this week as inflation has started to show up in the economic data. While not necessarily bad if it stays measured, if price and wage inflation spikes, you can bet the Federal Reserve will raise rates faster than currently expected.
So what can investors do to protect themselves against inflation? One of the best ways to protect a portfolio against inflation is to own gold, which is widely viewed as an inflation hedge and is a reliable measure of protection against purchasing power risk.
We screened the Merrill Lynch research universe for gold stocks that were rated Buy and found four that make sense for investors that feel that inflation is making its way back into the economy.
Agnico Eagle Mines
This is one of Wall Street’s most preferred U.S. gold producers. Agnico Eagle Mines Ltd. (NYSE: AEM) is a senior Canadian gold mining company that has produced precious metals since 1957. Its eight mines are located in Canada, Finland and Mexico, with exploration and development activities in each of these regions, as well as in the United States and Sweden. The company and its shareholders have full exposure to gold prices due to its long-standing policy of no forward gold sales. Agnico Eagle has declared a cash dividend every year since 1983.
The company posted solid four-quarter results and the analysts said this:
Agnico Eagle reported adjusted earnings per share of $0.21, in line with the Merrill Lynch estimates but a beat versus consensus. 2017 gold output beat forecast (again) For 2018 and 2019, the company has raised its prior gold output guidance to 1.53 million and 1.7 million ounces, though at higher costs. Agnico replaced reserves mined in 2017, thanks to converting Amaruq to reserves; and remains on track for 2 million ounces of output by 2020.
Shareholders receive a 1.09% dividend. The Merrill Lynch price target is $50, and the Wall Street consensus target is $54.84. Shares closed Thursday at $40.25.
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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 announced last year 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.
Merrill Lynch has a $5.80 price objective, while the consensus target price is $3.77. Shares closed Thursday at $3.63.
Newmont Mining
This is one of the largest mining companies, and its stock is a solid buy for more conservative accounts. Newmont Mining Corp. (NYSE: NEM) is a leading gold and copper producer. It employs approximately 29,000 employees and contractors, with the majority working at managed operations in the United States, Australia, Ghana, Peru, Indonesia and Suriname. Newmont is the only gold producer listed in the S&P 500 index.
Last year Newmont announced that “first gold” has been poured at its new mine, called the Merian gold mine, in Suriname in South America. It reported Merian contains gold reserves of 5.1 million ounces and that annual production is expected to average between 400,000 and 500,000 ounces of gold at competitive costs during the first five full years of production.
The company also just raised its dividend, and the analysis noted:
Newmont declared a quarterly dividend of $0.14/sh ($0.56/sh annualized), an 87% increase vs. the fourth quarter level. At the Investor Day on December 6, 2017, Newmont had indicated that it could increase the dividend by at least 50% In our view, Newmont has sufficient free cash flow to pay the higher dividend and continue reducing debt and investing in projects.
Shareholders receive a 1.5% dividend. The $46 Merrill Lynch price objective compares with a $43.06 consensus estimate. Shares closed on Thursday at $37.53.
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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.
The company posted in-line fiscal second-quarter results and the analysts said this:
Fiscal second quarter 2018 revenue was 7% higher year-over-year at $114.3 million, driven by Andacollo, the Wassa/Prestea stream, and Rainy River. The company is improving its net debt & liquidity profile by focusing on paying down debt.
Shareholders receive a 1.21% dividend. The Merrill Lynch price target is $98. The consensus target is $94.75, and shares closed Thursday at $82.48.
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Proper asset allocation should always include a single-digit percentage holding of precious metal like gold and silver. Not only do they hedge inflation over the long term, they can really help if the market does go into correction or bear market mode, as they tend to trade inverse to markets.
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