Commodities & Metals

Gold Is Breaking Out To 5-Year Highs and Could Be Going Much Higher

Lee Jackson

Published: June 21, 2019 7:02 am

Last Updated: January 30, 2020 7:27 pm

Almost quietly gold and the gold miners have consistently pushed higher, and despite the fact that naysayers constantly bemoan the fact that the precious metal offers no earnings potential, it does offer a safe store of value.

The SPDR Gold Shares ETF (NYSE: GLD) is up over 7% since the end of May after being hammered for half of last year. The yellow metal broke out to 5-year highs during trading on Thursday. It is perhaps the best pure play on gold for investors. Sure the massive May sell-off sparked some of the buying, but a cauldron of political issues at home, combined with trade conflicts, and geopolitical situations abroad have kept investors nervous, and with good reason.

The bull market reached the staggering age of ten years in March, from the upward move that started in March of 2009 when the S&P 500 hit an ominous intra-day low of 666 to close at an all-time high Thursday at 2954. By any measure, the market is overbought, and surely overvalued, however with the Federal Reserve poised to perhaps lower interest rates in July and maybe again before the end of 2019, stocks have the potential to make new all-time highs.

Some across Wall Street feel that gold is poised to go back to the $1,500 per ounce level or even higher after trading at $1,387 on Thursday. We screened the Merrill Lynch research universe database looking for the top stocks rated Buy and found four that look like outstanding plays now.

Agnico Eagle Mines

This top stock is one of Wall Street’s most preferred U.S. gold producers. Agnico Eagle Mines Limited (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 Merrill Lynch team loves the stock and noted this recently:

Agnico Eagle reported that its Meliadine mine achieved commercial output in mid May 2019 ahead of schedule and under budget. Agnico Eagle has a plethora of catalysts in 2019 such as Amaruq reaching commercial output in the third quarter and moving to free cash-flow in the third quarter. The achievement of the catalysts could lead to an upward revaluation in the company’s valuation multiple.

Shareholders are paid a small 1.03% dividend. The Merrill Lynch price target is at $55 and the Wall Street consensus is posted at $50.71. The stock closed Thursday at $49.90 up over 3%.

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.

The company posted solid fiscal first quarter results and the Merrill Lynch analysts said this:

The company reported first quarter EPS of $0.35, well above us and consensus both at $0.28 due to stronger contributions from certain assets. Franco-Nevada maintained 2019 guidance. Pierre Lassonde will retire as Chairman of the company in May 2020. The company hiked its quarterly dividend from $0.24 to $0.25/share, the 12th consecutive year of dividend increases.

Investors are paid a 1.21% dividend. Merrill Lynch has set their price target at $87, which compares with the consensus across Wall Street of $81.27. The shares were last seen trading on Thursday at $82.80.

Royal Gold

This a solid company 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 their sector peers. Backed by three new or expanding assets, Royal Gold’s revenue could grow by 13% to nearly $500 million during fiscal 2019. Royal Gold’s strong liquidity position also means it can compete for royalty and stream acquisitions.

Shareholders are paid a 1.06% dividend. The Merrill Lynch price target is $96 and should be going higher soon, and that compares with the consensus target of $96.26. The shares closed above both levels Thursday at $99.77.

Wheaton Precious Metals

This is another precious metals company that makes good sense for more conservative accounts looking to have exposure to the sector. Wheaton Precious Metals (NYSE: WPM) is a Canadian 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. Wheaton 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 2005-2010 tax years. Wheaton now anticipates that there will be no additional cash taxes for the 2010-25 taxation years for its international subsidiary. This tax case had depressed the valuation for much of 2019, and this outcome should help the shares continue to move higher

Shareholders are paid a 1.47% dividend. The Merrill Lynch price target is $30.50 and is comparable to the consensus target which is slightly lower at $29.77. The stock closed Thursday at $24.43.

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 also really help if the market does go into correction or bear market mode, as they tend to trade inversely to markets trading down.