While the recent pullback in gold prices has many predicting the end of the rally for gold, there are too many key factors that point to a sustained increase in gold prices. In fact, the dip in gold prices has put many of the top gold stocks in a great range.
Triple-Digit Upside for These Top Gold Stocks?
Gold and silver stocks have been the top performers in 2016 and for good reason. The economy is not as strong as it is being touted. And when the Federal Reserve raises rates in this environment, stocks tank and precious metals like gold and silver rise.
No one was really expecting gold to do much in 2016. In fact, most figured the gold price and, by extension, gold mining stocks would continue the descent that began in late 2012. After trading near $1,800 an ounce in October 2012, gold prices slipped over the next three years and ended 2015 at a five-year low near $1,060 per ounce, a decline of more than 40%.
But then came 2016. U.S. stocks careened lower with the S&P 500 off to its worst start on record. Over the first six weeks, the S&P 500 tumbled 10.5%, the Dow Jones Industrial Average lost more than 10.0% of its value, the tech-heavy NASDAQ was down 15.0%, and the Russell 2000 Small Cap Index plunged 17.0%.
Stocks slid amid mounting pressure that the biggest economies in the world were teetering on the brink of a recession. In China, the world’s second-largest economy, first-quarter gross domestic product (GDP) decreased to its slowest pace in seven years. That’s not a surprise when you consider China’s 2015 GDP was its weakest in 25 years.
In Japan, the world’s third-largest economy, the central bank maintained its negative interest rates and suggested future easing is a possibility.
During the first six weeks of 2016, as stock prices tanked, gold prices soared, climbing roughly 25% from $1,061 at the start of the year to a high of $1,306 in early May. For comparison’s sake, during the same timeframe, Market Vectors Gold Miners ETF (NYSEARCA:GDX) was up roughly 85%.
Interestingly, though, when stocks started to rebound, gold prices and gold mining stocks held onto their gains.
Why? Investors knew the broader economy was not doing well. The rebound in stocks had nothing to do with strong revenue or earnings growth; it had more to do with artificially low interest rates. It didn’t hurt that companies were continuing to buy back shares at a breakneck pace.
Gold Starts to Lose Its Luster…Prematurely
No equity remains perpetually on the investing radar. It’s important to identify trends and opportunities when they arise. Gold was a fabulous opportunity at the start of the year and despite the recent pullback in gold prices, it still is.
Gold, which has an inverse relationship to the U.S. dollar and stock market, has been pulling back on a stronger greenback and rising expectations the Federal Reserve will, once again, raise interest rates come June. Gold bulls had been expecting the Fed to hold off on any rate hikes until after the election, which means early 2017.
This might be in jeopardy.
Janet Yellen recently said at a Harvard University event that “It’s appropriate—and I have said this in the past—for the Fed to gradually and cautiously increase our overnight interest rate over time…and probably in the coming months such a move would be appropriate.” (Source: “Fed’s Yellen says an interest-rate rise is probably coming in ‘months’,” MarketWatch, May 30, 2016.)
If she’s looking for signs the U.S. economy and jobs market is improving to such an extent that it can support a rate hike, she may be mistaken. In the fourth quarter of 2015, GDP (before adjustments) was an anemic 0.7%. First-quarter GDP was 0.8%. That’s not the kind of economic trajectory to hang your hat on.
And we all know what happened the last time the Fed raised rates.
In December, the Federal Reserve raised rates for the first time in nearly a decade. The hike was minimal, but the outlook at the time was apparently upbeat enough that the Fed planned to boost rates four more times in 2016. That didn’t happen. What did happen (and I know correlation is not causation, but…) is that the markets tanked.
Regardless, right now, the sheen is coming off gold prices and gold mining stocks, and many are calling for the end of the gold rally. Again, I think their eulogy for gold is a little premature.
Fourth-quarter 2015 and first-quarter 2016 GDP were brutal, U.S. jobless data is miserable, and U.S. jobs growth is weak. The S&P 500 is in an earnings recession, having just celebrated its fourth consecutive quarter of year-over-year declines in earnings. The last time that happened was just before the market crash in 2008. The fifth consecutive quarter is just around the corner. (Source: “Earnings Insight,” FactSet, May 27, 2016.)
The underemployment rate remains near 10% and consumer spending is down, as are consumer confidence levels. It’s not a surprise when you consider a large number of Americans are living paycheck to paycheck and can’t afford a $400.00 emergency.
Those aren’t the best economic metrics for a nation that gets three-quarters of its GDP from consumer spending.
Thesis for Gold Prices and Gold Miners Intact
Within this framework, the Federal Reserve wants to raise rates. The Fed doesn’t have any wiggle room to raise rates and not negatively impact the U.S. economy and shock the stock market.
Analysts seem to have no issue warning how gold stocks are overheated and ripe for a 20% or more correction, but they seem entirely apathetic or unconcerned about the state of the U.S. and global economy or how much the stock market is overvalued.
For all of these reasons, I think gold prices and gold mining stocks will continue to do well throughout 2016. Of course, there will be bumps in the road. Investors are not the most rational people. However, the underlying fundamentals needed to send gold and silver prices higher remain intact.
Unless China, Japan, the eurozone, and the U.S. economies experience a miraculous turnaround and Donald Trump and Hillary Clinton have a road-to-Damascus experience, there will be no reason for the economy to improve and stocks to legitimately tick higher. This leaves gold and gold mining stocks as the best performers for the remainder of 2016.
Top 9 Gold Stocks
The vast majority of all major gold mining stocks have done remarkably well since the start of the year. Goldcorp Inc. (NYSE:GG) is up more than 40% year-to-date, Newmont Mining Corporation (NYSE:NEM) has increased around 75%, and Barrick Gold Corporation (NYSE:ABX) has advanced roughly 120%.
However, there are a lot of excellent smaller gold mining companies out there with a lot of additional upside potential. Here is a list of the top nine gold stocks for the second half of 2016:
Asanko Gold Inc (NYSEMKT:AKG)
Asanko Gold Inc explores, develops, and produces gold in Ghana. Ghana is the second-largest gold producer in Africa and the eighth largest in the world. The company’s flagship property, Asanko Gold Mine, announced commercial production in April. It has a gold resource base of 7.9 million ounces and reserves of 5.2 million ounces. (Source: “About Us,” Asanko Gold Inc, last accessed June 1, 2016.)
Yamana Gold Inc. (USA) (NYSE:AUY)
Yamana Gold Inc. has precious metal properties and land positions throughout the Americas, including in Argentina, Brazil, Chile, and Mexico. The gold mining company has total proven and probable reserves of 15.89 million ounces of gold, 99.09 million ounces of silver, and 3.0 billion pounds of copper. (Source: “Portfolio – Reserves and Resources,” Yamana Gold Inc., last accessed June 1, 2016)
Kinross Gold Corporation (USA) (NYSE:KGC)
Kinross Gold Corporation is one of the world’s top nine gold miners with operations in Brazil, Chile, Ghana, Mauritania, Russia, and the U.S. It also has projects in Canada, Ecuador, and Mexico. The company has proven and probable reserves of 33.2 million ounces of gold, 40.9 million ounces of silver, and 1.4 billion pounds of copper. (Source: “2015 Annual Mineral Reserve and Resource Statement,” Kinross Gold Corporation, last accessed June 1, 2016.)
B2Gold Corp (NYSEMKT:BTG)
Vancouver-based B2Gold Corp is one of the fastest-growing intermediate gold producers in the world. The company has four operating mines, one mine under construction, and numerous exploration projects across four continents. Construction of B2Gold’s Fekola mine in southwest Mali is projected to commence production at the end of 2017. As a result, production is expected to increase to approximately 800,000 to 850,000 ounces annually by 2018. (Source: “About,” B2Gold Corp, last accessed June 1, 2016.)
Sibanye Gold Ltd (ADR) (NYSE:SBGL)
Sibanye Gold Ltd is the largest individual producer of gold from South Africa and is one of the world’s 10 largest gold producers. The company owns and operates four underground and surface gold operations. (Source: “Group Profile,” Sibanye Gold Ltd, last accessed June 1, 2016.)
Pan American Silver Corp. (USA) (NASDAQ:PAAS)
Pan American Silver Corp. is one of the largest silver producers in the world and is actively working to diversify into gold. The company currently has seven operating mines in Mexico, Peru, Bolivia, and Argentina. It also has six projects in various stages of development and exploration. According to the most recent data, Pan American Silver has 299.9 million ounces of silver and 2.32 million ounces of gold in proven and probable reserves. (Source: “Reserves and Resources,” Pan American Silver, last accessed June 1, 2016.)
Coeur Mining Inc (NYSE:CDE)
Coeur Mining Inc is the largest U.S.-based primary silver producer and significant gold producer with mines in North America, South America, and Australia. The company produces approximately 18 million ounces of silver and more than 226,400 ounces of gold annually. Overall, Coeur has proven and probable mineral reserves of approximately 302.2 million silver equivalent ounces. (Source: “2016 Annual Report,” Coeur Mining Inc, last accessed June 1, 2016.)
Harmony Gold Mining Co. (ADR) (NYSE:HMY)
Harmony Gold Mining Co. has operations in South Africa and in Papua New Guinea. It also explores for copper, silver, uranium, and molybdenum. The company has mineral reserves of 42.6 million ounces and resources of 110.3 million ounces. In fiscal 2015, Harmony produced 1.08 million ounces of gold and was South Africa’s third-largest gold producer and was 12th largest in the world. (Source: “Corporate Profile,” Harmony Gold Mining Co., last accessed June 1, 2016.)
Nevsun Resources (USA) (NYSEMKT:NSU)
Nevsun Resources is engaged in the acquisition, exploration, development, and operation of gold, copper, zinc, and silver properties in Africa. Its flagship property is the Bisha Mine located in Western Eritrea, North-Eastern Africa. In 2016, Nevsun expects to produce 80–110 million pounds of copper and 70–100 million pounds of zinc, and monetize 80,000–100,000 gold equivalent ounces from stockpiles. (Source: “Nevsun Outlook Provides 2016 Production and Cost Guidance,” Nevsun Resources, February 11, 2016.)