Throughout human history, gold and silver have functioned as money due to their rareness and unique properties. Precious metals are a proven medium of exchange, portable, divisible, interchangeable, durable, and valued across the world. It’s remarkable that human civilizations of different eras, cultures, and geographies – all valued gold and silver, even though they had wildly different beliefs and ways of life. It almost seems as if the value of these assets is wired into our DNA.
Until 1971, all major currencies were backed by gold reserves, however, this changed under the Bretton-Woods agreement which severed the link between fiat currencies and gold. Now, gold and silver are less seen as money and more viewed as an investment option to protect purchasing power and tend to outperform during periods of high inflation and weak economic growth. Besides investment demand, there is also industrial demand for gold and silver due to their antimicrobial properties and ability to conduct electricity.
While many investors choose to invest in precious metals through ETFs, coins, or bullion, another option is to invest in gold and silver mining stocks. During bull markets, miners are the best performing group in the precious metals complex as any gains in the price flow straight to the bottom line. Of course, the key is to find miners with low costs and increasing production. 5 gold and silver miners with these characteristics are Centerra Gold (CGAU), DRDGold (DRD), New Gold (NGD), Gold Fields Limited (GFI), and B2Gold Corp. (BTG).
Gold and Silver Demand
Like most industries, the coronavirus dented demand for gold. In 2020, the total demand for gold was 3,759 tons which was a 14% decrease from 2019. It also marked the first year that demand fell under 4,000 tons since 2009. However, demand has roared back as 2021 saw a demand of 4,021 metric tons.
Gold has four major sources of demand – investment; jewelry; central banks; and technology and industrial applications. Investment demand makes up the largest share at around 45%. Notably, this demand has strengthened in part due to the Federal Reserve slashing rates, investors seeking safety, and concerns that fiscal and monetary stimulus would ignite inflation.
Due to the coronavirus, it’s not surprising that jewelry demand declined by 13% to 515.6 tons in 2020. 2021 saw a 52% recovery although it remains off pre-pandemic levels. However, jewelry demand should be higher than average in the next couple of years due to pent-up demand from this year’s drop in consumption. In total, jewelry accounts for about 39% of gold demand.
Many central banks hold gold as part of their reserves which they keep diversified through various assets and currencies. In normal years, central bank buying accounts for about 9% of gold demand. In 2020, central banks bought 279 tons which was a 59% drop from 2019. However, they added 463 tons of gold in 2021.
The final major component of gold demand comes from the technology industry. Gold is used in a variety of technology devices since it is resistant to rust and corrosion which makes it a great electric conductor and used in electronics and satellite communications. This accounts for about 8% of gold demand.
Silver has a much higher share of industrial demand. On average, 55% of silver demand is for industrial use due to its conductivity, malleability, and sensitivity to light. It’s used in areas that are growing rapidly such as solar panels, LEDs, screens, and semiconductors. Industrial demand for silver is forecast to increase primarily due to stronger growth.
26% of demand comes from jewelry and silverware. This segment should also do well in the coming years as it tangentially benefits from the economy reopening and subsequent release of pent-up demand over the last year.
Another 21% is due to investment demand which includes ETFs, coins, and bullion. Silver is considered to be a hedge against inflation. If this trend continues, then it’s likely to see continued inflows.
Gold and Silver Supply
The two sources of gold are mining and recycling. In 2021, 3,560 tons of gold were produced in total. This was an increase from last year’s production of 3,450 tons. On average, mining accounts for 73% of the gold supply and recycling the other 27%. However, more gold is recycled when the price moves higher.
72% of silver production is from mining projects, where it is a byproduct of mining other metals such as copper, lead, and zinc. Silver deposits are found all over the world but about 57% of accessible ones are in South and North America.
Relationship to Real Interest Rates
Changes in industrial demand are relatively muted, although it tends to follow the economy’s trend. In the short term, investment demand is the largest source of price moves in gold and silver.
Therefore, it’s not unusual to see large moves in the metals when important economic data comes out regarding inflation, employment, and growth. Investment demand for gold tends to track real interest rates which is the difference between short-term rates and the inflation rate.
When real interest rates are high or moving higher, investment demand for gold declines as investors can earn a positive return by keeping money in short-term Treasuries. However, demand increases when real interest rates decline or go negative as then gold’s zero rate of return becomes marginally more attractive.
Therefore, precious metals investment demand sees the largest rise during periods of slowing economic growth and rising inflation. Slowing growth makes it more likely that interest rates will decline and stay lower for a longer time, while inflation increases the appeal of hard assets over fiat-based ones.
As noted above, gold and silver miners are one of the best vehicles to gain exposure to the bull market in precious metals. The ones discussed below are trading at attractive valuations and have costs of production that are significantly lower than today’s prices. This means that further gains in the gold price will flow directly to the bottom line.
Gold and silver prices declined, along with most other assets, during the coronavirus crash in March of 2020. However, gold and silver prices rebounded with fervor, as the Fed and the federal government stepped up with major stimulus, and went on to make new highs in a matter of months.
However, precious metals peaked in 2020 as it became clear that the economy was improving. In 2021, the asset class was an underperformer despite some positive catalysts like low rates and rising inflation. However, in 2022, the asset class has outperformed in the first 2 months of the year as inflation remains elevated, while there are concerns that the economy could be slowing.
If you believe that gold and silver prices will continue to rise, then you should consider buying these 5 miners:
Centerra Gold (CGAU)
CGAU operates as a gold mining company that acquires, explores, and develops gold and copper properties in North America, Asia, and globally. The company’s principal project includes the 100% owned Mount Milligan gold-copper mine, located in British Columbia. It is headquartered in Toronto, Canada.
In 2021, CGAU produced 308,141 ounces of gold at an all-in cost between $700 and $750 per ounce. In total, the company has more than 4 million ounces of provable gold reserves in the ground. It also produced over 70 million pounds of copper and forecasts production closer to 80 million pounds in 2022.
At current gold prices, CGAU is very profitable as evidenced by its operating income of $200 million. In 2022, it forecast production of over 400,000 ounces of gold, a more than 30% increase, and a reduction in costs of $100 per ounce. Assuming that gold prices stay the same, this implies a more than 50% increase in operating income.
Given these positives, it’s not surprising that CGAU has an overall B rating, which translates to Buy in our POWR Rating system. The stock has a Quality grade of A due to its low cost of production. It has a Sentiment grade of B as Wall Street analysts are bullish on the stock with a consensus price target implying more than 30% upside. Click here to see the complete POWR Ratings for CGAU.
DRD operates as a gold mining company that engages in the surface gold tailings retreatment business in South Africa. Based in Johannesburg, South Africa, the company is involved in exploration, extraction, processing, and smelting activities. DRD extracts gold from the by-products of traditional mining which is environmentally friendly and has lower costs than traditional mining.
The company is also known for being an unhedged producer of gold which makes it one of the best stocks for when investors are feeling bullish about the price of gold. It also has paid out dividends for the last 15 years.
However, the company has faced some obstacles over the last couple of months which led the company to temporarily reduce its dividend due to higher than expected costs and weakness in the South African currency. Therefore, DRD has underperformed many of its peers.
This could prove to be a buying opportunity, especially for those investors who believe in the company’s process of extracting gold from waste. Additionally, the company has a long history of paying and raising dividends which means the recent cut could be temporary. Finally, 50.1% of DRD is owned by Sibanye Stillwater (SBSW) , one of the largest mining companies in the world.
DRD’s POWR Ratings reflect this promising outlook. The stock has an overall B rating, which equates to a Buy in our proprietary rating system. DRD has a Value grade of B due to its P/E of 8.2 It is ranked #4 in the Miners – Gold industry. Click here to see the complete POWR Ratings for DRD including Growth, Momentum, Stability, Sentiment, and Quality grades.
New Gold (NGD)
NGD explores gold, silver, and copper deposits. It is an intermediate gold mining company involved in the development and operation of mineral properties. The company’s principal operating properties include a 100% interest in the Rainy River gold-silver mine and New Afton gold-copper mine, located in Canada’s Ontario and British Columbia.
In 2021, NGD had $0.12 per share in earnings and $745 million in revenue. This year, analysts are forecasting $0.18 per share in earnings and $812 million. This gives NGD a very attractive forward P/E of 7.4, indicating significant upside if gold can make new all-time highs.
The company is working on increasing production and lowering costs, so analysts are even more bullish on its prospects in 2023 with $0.25 in EPS expected and over $900 million in revenue. The company also has $480 million in cash which is more than ⅓ of its market cap.
The one drawback for NGD is that it has a relatively high production cost of around $1,400. The company and many analysts are confident that production will trend higher and costs will move lower in the coming years. Further, if gold prices go on to make new highs, then the issue becomes moot.
Given these positives, it’s not surprising that NGD is rated a B in the POWR Ratings system. Due to its low valuation and large cash position, NGD is rated a B for Value. Click here to see more of NGD’s POWR Ratings.
Gold Fields Limited (GFI)
GFI is a producer of gold and copper, involved in underground and surface gold and copper mining, exploration, development, extraction, processing, and smelting. It holds interests in nine operating mines located in Australia, Peru, South Africa, and West Africa. GFI has 56.1 million ounces of gold equivalent reserves.
Most of GFI’s gold comes from Australia and West Africa. Like many miners, it was impacted by the coronavirus which led to lower production levels, although it was offset somewhat by higher prices. However, for the past year, GFI has been running at essentially full capacity.
In 2021, GFI had a net income of $789 million which was 9% higher than 2020. One big breakthrough for the company is the successful turnaround at the South Deep mine which is the third-largest known deposit of gold. After bleeding money for many years, it generated $97 million in 2021 which is expected to increase in the coming years as is production levels.
The company has been plagued by political issues and labor problems which were compounded by gold’s weakness. However, the outlook is improving as it believes it can reach a production target of 2.4 million ounces in 2024 due to new mines in Chile and South Deep.
These favorable developments make GFI one of the top ways for investors to bet on rising gold prices. The POWR Ratings also agree as the stock is rated a B which translates to a Buy rating. Further, it has a B for Value which isn’t surprising given its combination of low multiples and healthy cash reserves in addition to being cash flow positive.
If you are interested in GFI’s component grades for Growth, Momentum, Industry, Stability, Quality, and Sentiment, please click here.
B2Gold Corp (BTG)
BTG has operations in Mali, Philippines, and Namibia with reserves and development projects in a variety of additional locations. It’s known as one of the producers with the lowest costs due to easily accessible reserves in certain locations.
In 2021, BTG produced 950,000 ounces of gold. There was some adverse impact in earlier quarters due to the pandemic, but production materially increased in Q4. Overall, the company had earnings per share of $0.36 which was slightly lower than last year’s $0.49 per share.
Next year, analysts are expecting production between 900,000 and 1,050,000 ounces at an all-in cost of production between $1,010 and $1,050 per ounce. Currently, they are estimating earnings per share of $0.38 and $1.8 billion in revenue for the full year which would be modest improvements from 2021.
BTG is quite cheap with a forward P/E of 9.6. It’s also a mature company given that it’s expected to produce over 1 million ounces of gold for the next couple of years. The company also pays a 3.9% dividend yield which means that investors are rewarded for their patience.
Given these positives, it’s not surprising that BTG has an overall B rating, which equates to a Buy in the POWR Ratings system. The company also has an A for Quality which is consistent with its low cost of production, ownership of high-quality assets, and generous dividend yield. Click here for BTG’s complete POWR Ratings including component grades for Momentum and Growth.
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CGAU shares were trading at $9.70 per share on Monday afternoon, up $0.39 (+4.19%). Year-to-date, CGAU has gained 26.30%, versus a -8.89% rise in the benchmark S&P 500 index during the same period.
About the Author: Jaimini Desai
Jaimini Desai has been a financial writer and reporter for nearly a decade. His goal is to help readers identify risks and opportunities in the markets. He is the Chief Growth Strategist for StockNews.com and the editor of the POWR Growth and POWR Stocks Under $10 newsletters. Learn more about Jaimini’s background, along with links to his most recent articles. More...
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