Why Gold Is Exploding and Actually Could Rally to $2000 or Higher

There are always the proverbial gold bug investors who tout the precious metal constantly and always stay very overweight regardless of demand and the macro picture. The bottom line is that from an asset allocation standpoint, all structured portfolios need a weighting to precious metals between 3% and 5%. With that noted, there are times when you should overweight gold, and now could very well be one of those times.

When you combine the geopolitical witch’s brew of the trade issues with China, the instability in Hong Kong, rising tensions with Iran and the belligerence of the political cycle starting to reenter the news cycle in a big way, you have all the ingredients for gold to surge even more.

The SPDR Gold Shares ETF (NYSE: GLD) has broken out of a six-year trading trend, and while some big money has been made already, matching highs that were posted in 2012 would still represent an almost 25% move from current trading levels. Top technical gurus feel the long sideways move could be the impetus for a big price breakout.

We screened the Merrill Lynch research database, and found four stocks that the firm has rated Buy that are solid plays for investors looking to hedge volatility, and maybe put on a winning solid short-term trade that makes sense as well.

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Agnico Eagle Mines

This is one of Wall Street’s most preferred U.S. gold producers. Agnico Eagle Mines Ltd. (NYSE: AEM | AEM Price Prediction) 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 Merrill team loves the stock and noted this recently when the company posted solid second-quarter results:

Agnico Eagle reported a solid second quarter earnings beat of $0.10 with production higher and costs lower; LaRonde drove the output beat. We and the consensus were at second quarter numbers of $0.03 and $0.04, respectively. The positive adjusted EPS variance versus our estimates was due to commercial production of 383,000 ounces that was 6% higher.

Shareholders receive just a 0.81% dividend. The Merrill price target for the shares is $67.50, and the Wall Street consensus target is $63.08. The stock closed trading on Friday at $61.58.

Franco-Nevada

This off-the-radar play offers numerous ways for investors to make money. Franco-Nevada Inc. (NYSE: FNV) is a resource sector royalty and investment company that was formed to acquire an established portfolio of mining, oil and natural gas royalties and certain equity interests. The royalty assets were spun out of Newmont Mining.

The royalty portfolio represents over two decades of acquisitions by Newmont and the old Franco-Nevada, which Newmont acquired in 2002. Franco-Nevada intends to grow through the advancement of existing properties and through acquisitions and investments.

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The company posted solid fiscal first-quarter results, and the Merrill analysts said this at the time:

Franco-Nevada reported second quarter EPS of $0.34, better than us and consensus at $0.30 due to a lower-than-expected tax rate. For 2019, the company now expects GEO deliveries to be at the higher end of the prior range and energy revenue to be $100-$115 million. We see the revenues growing by nearly 20% to nearly $900 million for the 2019-21 period.

Investors receive a 1.05% dividend. Merrill has set its price target at $100.50. The consensus target is $81.27, and shares were last seen trading at $96.52.

Newmont Goldcorp

This is one of the largest mining companies, and its stock is a solid buy for more conservative accounts. Newmont Goldcorp 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.

Newmont recently purchased smaller rival Goldcorp in a deal valued at $10 billion, creating the world’s biggest gold producer by output. The deal is the second high-profile merger in the mining industry since Barrick Gold agreed to buy Randgold Resources last September to cut costs.

Shareholders receive a 1.45% dividend. The $53 Merrill price objective compares with the $44.64 posted consensus target. Shares closed on Friday at $38.57.

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Wheaton Precious Metals

This precious metals company makes good sense for more conservative accounts looking to have 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, the Lundin Mining Zinkgruvan mine in Sweden, and Glencore’s Antamina and Yauliyacu mines in Peru, then sells the silver and gold into the open market.

Last December, the company announced it had reached a favorable settlement with the Canada Revenue Agency with respect to the 2005 to 2010 tax years. Wheaton now anticipates that there will be no additional cash taxes for the 2010 to 2025 taxation years for its international subsidiary. This tax case had depressed the valuation and should help the shares continue to move higher.

Shareholders receive a 1.25% dividend. The Merrill price target is $33.50. The consensus target is slightly lower at $31.75, and the stock ended last week at $26.82.

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As noted, proper asset allocation should always include at least a single-digit percentage holding of precious metals like gold and silver. Not only do they hedge inflation over the long term, but they also can really help if the market does go into correction or bear market mode, as they tend to trade inverse to markets.