Unless there is a massive sell-off before the end of 2019 (and the decade), this will end up being the best year for investors since 2013. With the major indexes up by sizable double-digit percentages, it should be a very merry Christmas for stock market investors. The question is whether the new year will be happy.
Some top Wall Street strategists are nervous about next year, and with good reason. Price-to-earnings ratios for some of the benchmark indexes are trading well above the normal levels, and with stock buybacks increasingly supporting share prices, any drop there or in earnings could cause a major sell-off.
Toss in the potential for domestic political volatility, with the ongoing impeachment potential (which is increasingly partisan), geopolitical worries with an increasingly belligerent Iran and, of course, the unresolved trade wars with China and other countries. All these issues combined could be the recipe for a large correction.
One way to hedge a sell-off would be to buy gold. While the SPDR Gold Shares (NYSE: GLD) is an outstanding vehicle, investors may want to buy the top North American senior gold producers. A new RBC report notes that the historically unprofitable sector may be turning around, and it said this regarding the prospects for 2020 and beyond:
Despite a positive backdrop for gold prices over the past decade, historical profitability generated by the gold equity sector has lagged all other major sectors by a wide margin. While this historical financial performance is disappointing, important positive structural changes have been realized in recent years that have changed the outlook. These include balance sheet repair, improved operating cost structures, a renewed focus upon return of capital to shareholders, and consolidation emerging as a significant theme. We believe these factors materially limit potential downside risks for gold equities and improve gold equity investment prospects from purely a macro trading vehicle to their individual merits.
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Shares of three top companies are rated Outperform at RBC, and these stocks make sense for nervous investors looking to add some exposure to gold.
B2Gold
This is a small-cap gold stock for aggressive investors looking for sector exposure. B2Gold Corp. (NYSE: BTG) is a global, growth-oriented mid-tier gold producer whose primary assets include gold mines located in Nicaragua (La Libertad and El Limon), the Philippines (Masbate), Namibia (Otjikoto) and Mali (Fekola).
The company has stated that in 2019, based on current assumptions, consolidated gold production is forecast to be between 935,000 and 975,000 ounces, with cash operating costs projected to be $520 to $560 per ounce and all-in sustaining costs at $835 and $875 per ounce.
In addition, the company announced earlier positive drill results from the Mamba zone, which is within the Anaconda area, approximately 20 kilometers from the Fekola Mine, as well as positive infill drill results from the Fekola mineral resource area and step-out results north of the Fekola resource.
RBC has a $4.50 price target on the shares. The Wall Street consensus target is $3.50, and the stock closed Thursday’s trading at $3.73 per share.
Barrick Gold
This is one of the top companies in the industry, and its shares have backed up from the late summer and early fall rally and are offering a solid entry point. Barrick Gold Corp. (NYSE: GOLD) and Randgold Resources completed their merger on January 1, 2019. This has created the world’s largest gold company in terms of production, reserves and market capitalization.
The company reported solid third-quarter results in November, with adjusted earnings per share topping consensus estimates due to lower taxes. Barrick reiterated its 2019 operating guidance, and due to strong free-cash-flow, it hiked its quarterly dividend by 25% to $0.05. The five-year guidance sees gold output of 5.1 million to 5.6 million ounces at an all-in sustaining cost of $850 to $950 per ounce.
Investors receive a 1.17% dividend. The $20 RBC price target compares to a $20.26 consensus target. Shares closed most recently at $17.16.
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Wheaton Precious Metals
This precious metals royalty company makes good sense for more conservative accounts looking to have exposure to the sector. Wheaton Precious Metals (NYSE: WPM | WPM Price Prediction) is a Canada-based 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 receive a 1.28% dividend. The RBC price target is $33, but the consensus target is higher at $35.13. The stock closed at $18.06.
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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 inflation over the long term, but 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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