Should you invest in Gold or Gold mining companies?
According to the World Gold Council, central banks are adding Gold to their reserves. Gold prices are climbing and our stock signal model is telling us to look at gold mining stocks.
The World Gold Council published a report stating that 2023 was a stellar year for central gold demand. Net purchases, defined as the difference between gross purchases and gross sales, picked in May and steadily increased towards December.
All together, central banks added gold to their balance sheets for eight consecutive months.
Turkey, which is experiencing hyperinflation, grew their gold holdings by 12 tons.
China and India, the two largest and fastest growing economies of Asia, bought nearly 20 tons of gold.
In fact, total demand for gold has been increasing since the pandemic (year 2020, see chart below)
2022 was one of the best years for gold demand, as central banks increased purchases but also embarked on their aggressive interest rate hikes. Most financial markets sold off in 2022 on the back of a flight to quality theme in the background, coinciding with a war between Russia and Ukraine and rising inflation.
While Gold prices have been rising, the equity prices of Gold mining companies have yet to catch up.
Source: The Value Gap Between the Gold Price and Gold Miners (visualcapitalist.com)
Our model is telling us to add exposure to gold miners - we already own Kinross Gold Corporation (NYSE:KGC), which was one of the better performing tickers during the recent S&P 500 meltdown.
Is there a stock that outperformed Gold in the long run?
The model also identified Wheaton Precious Metals Corp (NYSE: WPM) as a potential runner. The firm has a strong track record that has delivered value to shareholders over many years.
As seen here in this diagram, total returns for WPM shareholders exceeded the performance of gold, silver as well as the broad GDX ETF over 1Y, 3Y, 5Y and 10Y (ending 25 March 2024).
About WPM
WPM is a precious metals streaming company with a high-quality portfolio of long-life, low-cost assets. They enter into streaming agreements with third-party independent mining companies to purchase all or a portion of their precious metals or cobalt production. As a consideration, their mining partners receive an upfront payment, plus additional payments upon delivery of the metals.
The company focuses on low-cost, long-life mines located in politically stable jurisdictions. Their streaming agreements cover 19 operating mines and 13 development stage projects, including a gold stream on Vale’s Salobo mine, and silver streams on Newmont’s Peñasquito mine and Glencore’s Antamina mine.
WPM’s business model
Most mines produce a variety of metals. For example, a copper mine may also produce significant amounts of gold and silver, and a lead-zinc mine may also produce significant amounts of silver. Those by-product metals are, generally, not a mine’s business focus and the mine may not be positioned to realize the maximum return from them. The streaming model allows mine operators such as WPM to realize more value from their by-product metals.
The outlook looks good
WPM is projecting a 40% production growth to 2028. These will come from their operating and development assets, which are permitted, development or in-construction assets.
Cash flows from production have been increasing. In 2023, production volume was 65 percent higher than in 2012. When gold and commodity prices soared in past cycles, excess cash flow were far higher than the company’s estimates. Excess cash flows have jumped since 2020 even though production volumes fell.
Company revenue is diversified across Gold, Silver and Palladium
Besides gold, WPM also recognized revenue from silver, which is an underrated precious metal. Silver is widely used in industrial activity and with the pick-up in the manufacturing sector - we could also see a boost from higher silver demand.
Based on forecasts, the stock is expected to increase 17% from the last price of $54
Source: Tipranks.com
Analysts from Tipranks think the stock has room to run. Our Quant model also thinks so.
Disclaimer
We own positions in Wheaton Precious Metals. Seven Fat Cows is not a financial adviser. You should seek independent legal, financial, or other advice to check if the information from this website relates to your unique circumstances.