If bullishness begets more bullishness, then you would assume that the current market setup is perfect for further gains. With the benchmark S&P 500 near all-time highs, along with the novel coronavirus pandemic fading steadily into the rearview mirror, confidence appears to be back. I hope so. But just in case, you might want to consider adding gold and silver stocks to your portfolio.
Oh no, not this hesitancy again, some of you might be saying. At this point, I might sound like the doom-and-gloom chicken little fearmonger that has successfully called the past eight of two corrections. However, I think it’s fair to point out that there’s an ebb and flow to the market. When it has been ebbing or flowing too much in one direction, gold and silver stocks provide a hedge against uncertainty.
Nor am I being contrarian for contrarianism’s sake. As a Bloomberg report pointed out recently, several economic and market indicators point toward broadening optimism. In this case, it would be seemingly foolish to consider gold and silver stocks. After all, these are equity units tied to physical commodities or pejoratively, a bunch of dumb rocks that don’t pay dividends.
However, Lu Wang, the author of the aforementioned Bloomberg piece, warns us to “look past the sunshine and lollipops, and you’ll find a growing sense of defensiveness.” If you do, the narrative for gold and silver stocks seems much more appealing.
“There are even indications that the S&P 500’s 90% rally from the pandemic bottom could be due for a pause, since fewer stocks are participating in the latest leg up. This has helped put a halt to massive equity inflows and driven a sharp demand for government bonds.”
Further, with cryptocurrencies suffering significantly — a circumstance of which I’ve been warning about in my weekly update for digital assets — it’s probably time to at least think about some modest exposure to gold and silver stocks.
- Newmont (NYSE:NEM)
- Barrick Gold (NYSE:GOLD)
- Freeport-McMoRan (NYSE:FCX)
- Wheaton Precious Metals (NYSE:WPM)
- Royal Gold (NASDAQ:RGLD)
- First Majestic Silver (NYSE:AG)
- Newcore Gold (OTCMKTS:NCAUF)
Of course, no one knows for certain what will happen next. But the reality for precious metals is that they’ve been around since the beginning of time and will likely maintain their universal intrinsic value. Therefore, it’s worth keeping an eye on these gold and silver stocks.
Gold and Silver Stocks: Newmont (NEM)
One of the titans among gold and silver stocks, Newmont has the “largest gold reserve base in the industry,” according to its website. Based on data compiled by Statista.com, Newmont regularly produces 5 million ounces of gold or more every year. Moreover, the company is one of the leading producers of silver and copper, making it an ideal investment for those concerned about growing fear in the economy.
Indeed, you might make a case that a stake in NEM stock is far better than buying physical precious metals. While advocates for coins and bullion bars will often say that unless you hold it, you don’t own it, the reality is that such ownership is a real pain. Mainly, you’ve got to worry about security and insurance — challenging features of any physical asset.
Moreover, reliable blue-chip gold and silver stocks like NEM make significant financial sense. Let’s just say for instance that the economy doesn’t implode like some folks fear. If you held onto physical bullion, you’re just left with physical bullion. But with NEM stock, which pays a last-12-month (LTM) dividend yielding 3.6%, you at least get some passive income for your troubles.
Barrick Gold (GOLD)
Since the deflation of the gold market in 2011, along with the lingering impact of the Great Recession, Barrick Gold has not looked the same. In the ensuing years before the pandemic, GOLD — like so many other gold and silver stocks — struggled for traction and a general sense of direction. But with the economy looking robust under the pre-coronavirus Trump administration, there was no reason to get defensive.
Then Covid-19 hit and suddenly the narrative changed. Well, at least for several months it did. With the underlying precious metals markets moving higher based on the fear trade, GOLD stock finally showed signs of life. Alas, enthusiasm peaked in September and began fading away as the pharmaceutical industry began making encouraging progress with Covid vaccines.
But now, it seems the wind may be blowing in a favorable direction again for gold and silver stocks. With the spot gold price seemingly finding a bottom at the end of March this year, this could translate to a higher market value for GOLD stock. Additionally, because other equity sectors appear stretched, Barrick might offer a more viable platform for upside.
Gold and Silver Stocks: Freeport-McMoRan (FCX)
Primarily known for its prowess in copper production, Freeport-McMoRan technically falls under the category of gold and silver stocks. According to the company’s website, “Molybdenum concentrate, gold and silver are also produced by certain of FCX’s North America copper mines.”
In my opinion, this diverse production portfolio gives Freeport-McMoRan the ability to facilitate a hedge within a hedge. If you’re deeply concerned about the economy or a market correction and you want exposure to precious metals, FCX stock provides that for you. However, if we manage to avoid a bullet regarding economic or social instability, then the underlying company’s massive copper outlays should help lift shares higher.
In fact, that’s one of the reasons why I personally included FCX stock in my portfolio. Sure enough, this dual storyline has done very well for me since the pandemic doldrums last year. In large part, the surge in interest toward electric vehicles have benefited FCX stakeholders.
From information provided by the CME Group, “Electric vehicles use more than double the copper of an internal combustion engine automobile, and the metal is also used heavily in EV infrastructure.” If you believe in EVs, you may want to consider FCX.
Wheaton Precious Metals (WPM)
For diversification within your portfolio of gold and silver stocks, you should put Wheaton Precious Metals on your radar. One of the world’s largest precious metals streaming companies, WPM stock provides investors with cost predictability thanks to the structure of the underlying business.
Rather than directly mining the metals, Wheaton provides cash to a mining operator up front. In return, Wheaton enjoys the right to purchase said metals at a discounted rate at some point in the future. Because of the contractual nature of the transaction, shareholders of WPM stock have the benefit of avoiding some of the fluctuations involved in commodity pricing dynamics.
Of course, nothing is without consequences and a streaming model is no exception. While it usually offers downside mitigation, it may also limit upside potential. Again, it has to do with the contractual nature of streaming firms. Since the cost structure is already built in, if the metals market rises substantially, it’s usually better to be exposed to direct gold and silver stocks.
Still, you never know what’s going to happen with this sector. Therefore, WPM stock is a worthwhile inclusion in combination with other metals-based investments.
Gold and Silver Stocks: Royal Gold (RGLD)
As you might guess from its name, Royal Gold is similar to Wheaton Precious Metals but in this case, the underlying business is a royalty model as opposed to streaming. What’s the difference? While both models offer upfront cash to mining operators, royalty firms receive a fixed percentage of the miner’s generated revenue. In contrast, streaming companies receive the actual metals.
However, the reason to consider RGLD is identical to other streaming gold and silver stocks, namely cost predictability. Because the terms are under contract, Royal Gold has a better idea of their growth projections. Further, royalty businesses tend to navigate uncertainty better than direct players. In 2020, Royal Gold generated revenue of nearly $499 million, up 18% from the prior year’s tally.
Also, the company offers an LTM yield of 1%. While it’s nothing to write home about, it’s a non-zero number. Honestly, despite my appreciation for physical precious metals, that’s all they’ll yield, zero. So in that sense, RGLD stock makes sense.
Nevertheless, keep in mind that if the spot price of gold falls, mining companies will generate less revenue. This in turn will negatively affect royalty businesses.
First Majestic Silver (AG)
Headquartered in Vancouver, Canada, First Majestic Silver operates in Mexico, focusing on the country’s robust silver resources. The No. 2 monetary precious metal, silver is an intriguing metal for those who wish to speculate on the market. Also, it helps to have an ironclad stomach because you’re going to need it.
Generally speaking, silver prices correlate with gold. However, the manner in which it tracks gold can give investors headaches. That’s really the case with AG stock. Over the trailing month, First Majestic shares declined by nearly 21%. Compare that to Newmont shares, which is down only a little over 3% during the same frame.
However, it’s also fair to point out that the upside potential for AG is going to be much higher than the large established gold and silver stocks. Given that we’re in a period where random posts on social media is now a legitimate market catalyst, First Majestic shares may also receive speculative interest in the future.
Sure, AG stock is “cheap” but it’s not just that. At time of writing, the spot silver price is $25.67, which psychologically supports the case for AG. Trust me, I know this doesn’t make sense in the traditional framework — I’m just referencing the possible thinking process of the social media crowd.
Gold and Silver Stocks: Newcore Gold (NCAUF)
With Newcore Gold, I’ve saved the most speculative outfit among gold and silver stocks for last. Trust me on this, you don’t want to spend a dime more than you can afford to lose on NCAUF stock. Given its extremely speculative profile, this really could go either way. And just to be clear, losing money on speculative miners is a common occurrence.
An exploration firm, Newcore “has no reportable segment revenues” according to its Q1 2021 earnings report. Instead, the company is an aspirational bet. If it succeeds in its strategy, which involves leveraging its experienced leadership team to extract gold from its project, then NCAUF could fly. If not, you might as well have flushed your money down the toilet.
To be fair, there is some basis for hope. Newcore has 100% ownership of its Enchi Gold Project in Ghana. From the company’s website, “Enchi, with over a million ounces of inferred resources lies along one of West Africa’s most prolific and developed gold trends.”
But will that actually translate to anything? That’s the big question mark with exploration miners. For gamblers, Newcore is the stock market’s version of a lottery ticket.
On the date of publication, Josh Enomoto held a LONG position in gold, silver and FCX. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare.