Gold and silver have exhibited more volatility than usual this year. Gold started the year at $1,521 and rallied 12% into March to $1,700. However, these gains quickly evaporated as the coronavirus induced sell-off turned into a liquidation event that resulted in weakness for safe assets like gold and bonds.
In hindsight, this decline was an ideal entry point as gold went on to rally 42% over the next five months and made new, all-time highs. Gold ended up topping at $2,089 in early-August. Silver also had an impressive 150% rally off its March lows to a high of $29. Notably, silver remained well-below its 2011 peak of $49.
Gold’s and silver’s post-March gains were driven by the poor economic outlook, rate cuts, central bank asset purchases, dovish forward guidance, trillions in deficit spending, and a weaker dollar. However, in the past few months, both metals have endured significant pullbacks from their August highs.
The major factor in this recent correction was the better-than-expected economic recovery. As the economy reopened, metrics like employment, industrial activity, and consumer spending bounced back at a faster pace than expected. This caused longer-term interest rates to perk up which resulted in profit-taking in precious metals.
Near-Term Outlook
In recent weeks, gold and silver have been moving higher. From November 30th, gold is up 7%, while silver is up 20%. Naturally, investors are wondering if this is simply an oversold bounce or is it a resumption of the bull market which started in the Spring?
I believe that precious metals are in a bull market and expect gold to make new all-time highs in 2021. Relative to the August highs, silver is down about 11%, while gold is off 9% from its peak.
Precious metals’ fundamentals continue to improve. There is increasing inflationary pressure in the economy which is evident from the strength in commodities like copper, iron ore, and lumber. Demand for these items should continue to strengthen due to the bull market in housing and growth in industrial activity.
Another reason to expect more inflation is that countries all over the world are aggressively deploying fiscal stimulus to boost their economies. On top of this, there’s going to be significant pent-up demand unleashed next year as the world gets vaccinated.
Usually, the counterweight to increasing inflation is that the Fed tightens policy. However, this time is different.
The Fed has revised its inflation framework to hike only when rates are “symmetrically” above its 2% target. Therefore, monetary policy will get “looser” as the economy improves. At the depths of the recession in March, the difference between the 10-year and the Fed Funds rate was 0.55%. Today, it’s at 0.92%. As economic activity continues improving, and the pandemic nears an end, the curve will only get steeper which means that real interest rates will move lower.
All of these developments are positive for precious metals. During precious metal bull markets, the mining stocks are usually the best performers. These companies’ equity prices can see big gains as rising prices mean increased earnings in addition to the value of their assets increasing. Four gold and silver miners that investors should consider buying are New Gold (NGD), Fortuna Silver Mines (FSM), Newmont Gold (NEM), and Endeavour Silver (EXK).
New Gold Mining (NGD)
NGD has operations in the United States, Canada, Chile, Mexico, and Australia. YTD, the stock is up 222%. It’s also unusual among gold and silver mining stocks in that it made a new, 52-week high this year. This relative strength is mainly due to the company’s turnaround efforts to increase production and sell off some assets.
It recently sold its operations in the Blackwater project to Artemis Gold for $190 million along with a gold stream of 8% and $34 million in stock. The company has also closed a strategic partnership deal with the Ontario Teachers’ Pension Plan for a 46% free cash flow interest in the New Afton mine.
These efforts ensured that the company will have enough cash to continue its operations and stave off any bankruptcy risk. It’s also successfully brought back production to pre-pandemic levels. NGD’s turnaround is impressive. However, it still has more upside as prices are 80% lower than when gold was at its previous high in 2012.
NGD’s promising outlook is reflected in its POWR Ratings, it has a Strong Buy rating with an “A” for Trade Grade, Buy & Hold Grade, and Peer Grade. Out of 30 gold mining stocks, it’s ranked #2.
Fortuna Silver Mines (FSM)
FSM is another miner showing relative strength compared to its peers. While most stocks in the sector have slid lower with gold and silver, FSM has remained range-bound between $6 and $8.
This is a positive leading indicator that shares are under accumulation.
In part, it’s due to the company’s success in ramping up production back to pre-coronavirus levels of 2 million ounces per quarter. FSM’s all-in cost for silver is around $10.80 per ounce. Therefore, the company is quite profitable at current prices, especially as it expects to continue increasing production.
The POWR Ratings are bullish on the stock as it has a Buy rating. It has an “A” for Trade Grade and Peer Grade with a “B” for Buy & Hold Grade. It’s ranked #3 out of 12 silver mining stocks.
Newmont Gold (NEM)
Newmont is the largest gold producer in the world. The company is very attractive from a valuation perspective with a forward price-to-earnings ratio of 14. Due to higher gold prices and more production, it expects earnings to rise by 68% in 2021 and by 34% annually over the next five years. It also pays a 2.6% dividend yield as well.
On a technical basis, NEM looks quite intriguing as the stock has been range-bound since April, trading between $60 and $70. This consolidation is happening at the same level that the stock topped in 2012. Given my bullish forecast for precious metals, I believe NEM will break higher from this range.
The POWR Ratings rate NEM a Buy. It has a “B” for Buy & Hold Grade and Peer Grade. Among 30 gold miners, it’s ranked #3.
Endeavour Silver (EXK)
EXK is one of the more volatile silver stocks since it has a high cost of production - $22 per ounce. While this is a liability during bear markets, it gives the stock the most upside when silver prices rise. For example since November 30, silver is up 12%, while EXK is up 43%.
The recovery in silver prices over the last year is helping the company go from losing about $0.30 per share to earning a $0.35 per share profit over the next 12 months. This gives it a forward price-to-earnings ratio of 17. About 60% of its revenues come from silver with the other 40% coming from gold.
EXK is rated a Buy. It has an “A” for Buy & Hold Grade and Peer Grade with a “B” for Trade Grade. Among 12 silver miners, it’s ranked #4.
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NEM shares . Year-to-date, NEM has gained 41.71%, versus a 16.35% 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. As a reporter, he covered the bond market, earnings, and economic data, publishing multiple times a day to readers all over the world. Learn more about Jaimini’s background, along with links to his most recent articles.
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