So much for that currency manipulation argument! During last year’s campaign trail, then-candidate Donald Trump accused foreign nations of manipulating their currencies to artificially garner economic tailwinds. But so far this year, it’s our U.S. Dollar Index that’s down an alarming 10%. With such rapid dollar devaluation, commodities and precious metal stocks could be back in vogue.
To be fair, President Trump has a point — although his delivery would benefit from a tad of diplomatic discretion. Under commonly accepted economic principles, a stronger currency would stymie exports, as the exporting nation’s goods are not “competitively priced.” On the flipside, a weaker currency would encourage exports as the importing nation’s citizenry can afford more goods.
From the consumer standpoint, a stronger greenback allowed consumers to purchase more made-in-China products, which is obviously beneficial. But now, a declining dollar value creates an inflationary effect — more money chases fewer goods. To avoid getting caught out, astute investors often turn to commodities and precious metal stocks.
Should the greenback continue to fall, it will take more dollars to buy equivalent units of commodities. Considering that traditional safe-haven assets, such as gold and silver bullion, have recently experienced multiyear lows, now is seemingly a great contrarian opportunity. If anything, investors have the confidence that they’re definitely not buying commodities at record price levels.
Here are four precious metal stocks to buy in light of shifting winds in the markets.
Precious Metal Stocks: Agnico Eagle Mines (AEM)
Gold miners took a beating over the last five to six years, and Agnico Eagle Mines Ltd (USA) (NYSE:AEM) is no different. At its peak in late 2010, AEM stock briefly crossed the $85 level. Since then, Agnico, along with other mining companies, slipped badly. However, a much-needed pricing boost in commodities has breathed new life into Agnico and precious metal stocks.
Year-to-date, AEM stock is up over 7%. While not necessarily the most impressive performance considering that the benchmark SPDR S&P 500 ETF Trust (NYSEARCA:SPY) is up 14%, Agnico levers intriguing tailwinds.
As mentioned before, the declining dollar index provides upside support for AEM. Furthermore, gold gained 23% over the past two years after losing nearly half its market value from its all-time peak.
The bullion markets’ recovery rally has been modest, which suggests we may be in the early phases of the recovery. Consider that geopolitical turmoil, most notably North Korea and our unexpectedly declining relations with Russia, reign supreme. Such fears are “good” for gold, and whatever is good for gold is good for AEM stock.
Precious Metal Stocks: Sibanye Gold Ltd (SBGL)
Before I dive into my next idea for precious metal stocks, I offer a strong warning: Sibanye Gold Ltd (ADR) (NYSE:SBGL) is a speculative company. Investment information site Gurufocus.com cautions that SBGL stock carries four “severe warning signs.” Among the several worrying points are negative profitability margins, eroding free cash flow, and excessive debt.
So why take a shot on SBGL stock? To bring context to the poor financials, Sibanye acquired Stillwater Mining Company for $2.2 billion at 2016 end. Such acquisitions occurring is no surprise as other businesses involved in commodities consolidate to better withstand downside pressures. In my opinion, Sibanye made an intriguing, and perhaps lucrative deal due to Stillwater’s platinum operations.
Usually, it’s not good practice to buy precious metal stocks on the basis of one particular asset. Miners almost always extract both base and precious metals; otherwise, they may quickly go out of business. But in platinum’s case, an exception can be made.
Presently, we’re witnessing an uncommon occurrence in the commodities market — gold is priced higher than platinum. That’s incredibly unusual considering that platinum is much rarer than gold. Furthermore, platinum mining is significantly costlier and more onerous than gold mining. Yet, gold trades at a near-38% premium.
Strange trends pop up from time to time in the commodities market. However, I’d bet that this circumstance won’t last for long, which may spell great things for SBGL stock.
Precious Metal Stocks: Sociedad Quimica y Minera de Chile (SQM)
Although not technically belonging under precious metal stocks, Sociedad Quimica y Minera de Chile (ADR) (NYSE:SQM) mines a critical asset: lithium. If you use any modern device, from smartphones to electric vehicles to e-cigarettes, you know firsthand how important lithium is. Indeed, as we progress further into the 21st century, lithium supply will become more vital, potentially pushing SQM stock higher.
Admittedly, not too many dedicated lithium miners exist, making Sociedad Quimica somewhat speculative. However, two main drivers support SQM stock. First, the Chilean miner advantages its underlying nation’s economic resurgence. In a recent InvestorPlace article, I pegged iShares MSCI Chile Inv. Mt. Idx. Fd(ETF) (NYSEARCA:ECH) as a solid investment. Chile primarily exports resources, and a weakening dollar is a natural tailwind.
Second, lithium’s global demand is already skyrocketing, and will likely only soar from here on out. Companies like Tesla Inc (NASDAQ:TSLA) radically transformed the consumer electronics industry, to the point that they turned states like Nevada into a modern-day gold rush. Even with this increased supply source, lithium is still incredibly rare among commodities.
Such a powerful supply-demand picture only solidifies the case for SQM stock, making it a must-watch investment.
Precious Metal Stocks: Lonmin Plc (ADR)
Even more speculative than the aforementioned Sibanye is Lonmin Plc (ADR) (OTCMKTS:LNMIY). For starters, LNMIY stock is listed in the over-the-counter exchange, where many miners go to die. Second, shares hemorrhaged more than 41% YTD.
The one salvaging factor is Lonmin’s palladium projects from relatively stable South Africa.
Undoubtedly, palladium is in a unique position today. With supply largely controlled by the Russians, any tension involving the country typically spikes the palladium price. It’s also the rare precious metal that hit multiyear record highs while others dropped. At this rate, palladium may actually hit and exceed all-time record highs. That alone makes LNMIY stock worth a second look.
Also consider that at the time of writing, palladium exceeds platinum’s price. Currently, industrial demand for palladium centers on catalytic converters. That was a boon for automakers when the west enjoyed stable relations with Russia, and palladium prices were reasonable. Now, the entire paradigm has shifted, which is problematic for some industries. However, LNMIY stock could benefit handsomely.
The bullish argument is very simple: no substantially cheaper alternative to palladium exists. Platinum’s spot-price is only 4% lower than palladium. From a chemistry standpoint, rhodium acts as a substitute; however, rhodium is one of the rarest commodities and is also more expensive than palladium. Given this unusual dynamic, most fundamentally sound precious metal stocks are likely to rise.
But Lonmin’s palladium operations gives it a considerable advantage, which is why I’m eyeing LNMIY stock as a speculative bet.
As of this writing, Josh Enomoto is long platinum and palladium bullion.