Over the past year, shares of the Canadian-based gold miner Kinross Gold (NYSE:KGC) are up over 70%. Gold has recently hit a high for 2020 and the gold spot price is up over 10% year-to-date, hovering around $1,683 per ounce. And KGC stock has been one of the prime beneficiaries of the run up in gold price as well improved conditions across the industry.
All asset classes have their advantages and disadvantages. So far in 2020, gold is proving to be one of the best investment instruments. But gold prices can be volatile, so I wouldn’t necessarily load up the truck. Indeed many analysts recommend a 5% to 10% allocation of a personal investment portfolio to gold as an insurance policy. There are different ways to participate in the volatility or increase in the price of gold. One way is to invest in gold mining companies like Kinross Gold. Let’s take a closer look.
Gold as an Asset Class
Gold has fascinated humans since the dawn of time. Today, most gold produced is used for jewelry or investing purposes.
There are different reasons behind this year’s rally in gold, including the worries about the recent coronavirus outbreak, choppiness in the oil market, talk of a global recession, and rather volatile global equities.
This shiny metal’s price tends to shoot up in turbulent times as investors turn to traditional safe havens like gold. Between 2007 and 2011, mainly during the global financial crisis, the price of gold went from $700 per ounce to an all-time record of $1,900 in September 2011.
The current rally in the price started in June 2019 when gold traded around $1,300 per ounce. It looks like the move up is finding support due to the current volatile backdrop. Could gold once again hit $1,900 in 2020?
You may be familiar with arguments about gold being a hedge against inflation and a store of wealth. In general, gold has also had a negative correlation to stocks.
Analysts are also discussing the near-term possibility that U.S. dollar interest rates may go to zero and that pressure may be put on the Fed to introduce negative rates. If U.S. dollar deposits see negative rates, smart money is likely to move not into other currencies, but possibly into commodities, including precious metals such as gold.
KGC Stock Offers Gold Alternative
Many investors regard gold miners as a proxy for gold. And in recent months, many gold miners have indeed seen their share prices pop as the global gold price has surged.
Moody’s Investor Service on March 2 upgraded Kinross Gold’s credit rating to investment grade as its cash cost was “in line with investment grade peers, steady production and conservative financial policies.”
The upgrade follows the company’s most recent earnings. On Feb. 13, management released fourth quarter and year-end 2019 results which most investors approved of. Management has either met or exceeded guidance targets for production, costs and capital expenditures for the past eight years.
The miner posted a profit of $521.5 million or 41 cents per share in Q4. A year ago, the numbers were a loss of $27.7 million or 2 cents a share.
During 2019, the group generated robust free cash flow. In Q4, it increased liquidity position to over $2 billion. InvestorPlace contributor and Louis Navellier recently provided a detailed analysis of the company, with a focus on its strong cash balance.
Management expects to further reduce capital expenditures by approximately $100 million in 2021 compared to 2020 guidance.
If gold remains at its current price or moves higher, miners, like KGC, will likely report better margins and rising free cash flow, potentially boosting their stock prices even further.
On a final note, when a company owns a mine, it also owns all of the gold stored within it. Kinross Gold currently has mines and projects in the U.S., Brazil, Russia, Mauritania, Chile and Ghana.
However, I’d like to remind readers that there may be geopolitical risks regarding the country where the mine is located. In other words, miners’ share prices tend to be rather choppy.
We cannot know the future with certainty. However, for a good number of people gold is an important asset for defensive diversification. If you also think that the recent strength is the start of a new rally in the precious metal, then gold mining companies like Kinross Gold will likely continue to have a bright 2020.
If you are an investor who also follows short-term technical charts, you may be interested to know that prices of both spot gold as well as KGS stock are at overbought levels. On Feb. 24, Kinross Gold shares reached a 52-week high of $6.27. They are currently hovering around $5.70. Although the rally could still continue in March, a pullback is looking more likely in the coming days.
However such a drop in price may provide a better entry point for long-term investors who would like to buy into KGC shares. Yet passive income investors should note that most gold miners either do not pay any dividends or are low-dividend payers. KGC stock does not pay a dividend.
If you would like to invest in gold miners, but would like to diversify across the industry, then there are also investment funds or exchange-traded funds (ETFs) that invest in gold miners or synthetically holds gold bullion. Examples of such funds would be the VanEck Vectors Gold Miners ETF (NYSEARCA:GDX) or the SPDR Gold Shares (NYSEARCA:GLD).
As of this writing, the author did not hold any of the aforementioned securities.