Investors most often buy gold to hedge against risks like rising inflation, geopolitical events, and economic downturns that can cause the price of gold to be very volatile.
This is why the price of gold surged by double digits during the first few months of the year, primarily driven by inflationary and geopolitical uncertainty plaguing investor minds.
While there are several benefits to buying gold stocks, they have particularly proved to be beneficial compared to buying the physical metal as gold companies can potentially generate higher total returns.
This is because these companies can expand their production and reduce costs, enabling gold mining companies to outperform the price of gold.
However, not all gold stocks outperform gold, which is why investors need to prudently choose the best gold stocks to buy. So here are the best bets when it comes to gold stocks, as compiled by analysts.
(The business fundamentals and analyst ratings for these firms are also discussed to provide readers with some additional context for their investment choices.)
Another factor to pay attention to is hedge fund sentiment. Research has shown that groups of hedge fund holdings outperformed exchange-traded funds by 79 percentage points since March 2017.
This is why analysts commonly believe that hedge fund sentiment is an extremely useful indicator that investors should pay attention to.
1. Canada’s Barrick Gold Corporation
Canada’s Barrick had been the world's largest gold mining company until US-based gold miner Newmont Corporation acquired Canadian peer producer of the yellow metal Goldcorp in 2019.
Barrick has met or beaten market consensus on its financial and operating results for eleven consecutive quarters as of 2021.
Analysts like it for being stable and being the largest player in the world. Inflation is widely expected to put pressure on gold producers and give investors a cheaper entry point into the market.
With the price of gold staying high because of inflation concerns and the Russia-Ukraine conflict, gives investors another good reason to buy the stock in the near term.
Barrick Gold Corporation was in about 50 hedge funds' portfolios until late last year. The all-time high for this statistic is 54.
Barrick owns 14 gold mines, six of which are tier-one gold assets, which means these six mines have a life expectancy of more than 10 years, with annual production of at least 500,000 ounces of gold.
To put it simply, the company owns six assets of the highest quality and highest expected return in the gold industry. As mines pull gold out of the earth, these deposits are eventually depleted.
Barrick is constantly exploring and acquiring new land and working toward the development of new mines.
When looking for and developing new assets, the company centres its focus on potential mining opportunities that are to have a long life expectancy and come with the strong operating margins.
Processing entails converting rock and ore into a high-purity metallic alloy, which typically contains 60-90 percent gold.
Several factors, such as the spot price of gold or input costs, will influence which areas of an orebody are deemed profitable (economic) to mine throughout its life.
An operating margin is a measure of how much profit a company makes after deducting for variable costs of production. A company needs a healthy operating margin in order to pay for its fixed costs.
2. US’ Newmont Corporation
The largest gold miner in the world Newmont Corporation produces and explores for gold. Majority analysts have kept a ‘Buy’ rating on Newmont stock and raised near-term price target to $75 (Dh275).
Analysts cite the reason for the rating being the capital allocation priorities of the firm staying intact. One upside for this stock is whenever the price of gold has fallen, shares continued to stay stable.
Although the company has flagged that inflation pressures were likely to push its costs higher analysts’ opinion of the stock hasn’t changed.
This is because the stock has historically offered steady production, a good pipeline of projects, with a strong balance sheet and proven management.
At the end of the fourth quarter of 2021, 45 hedge funds held stakes worth $1.3 billion (Dh4.78 billion) in Newmont Corporation, compared to 48 in the preceding quarter worth $774 million (Dh2.8 billion).
The company’s gold reserve base — a line-up of unmined gold resources — is a key stand-out factor for Newmont, with more than 90 per cent of this reserve base being located in top-tier jurisdictions.
As the company continues to build out its mining capacity, maintaining its position as the leader in its industry, it only makes sense that continued growth in value can be expected.
Like Barrick, Newmont is always working to expand its reach, developing new mines before currently operational mines ever get close to depletion.
3. Australia’s BHP Group Ltd
The largest mining company by market cap, BHP is headquartered in Australia but operates just about everywhere there are raw materials that can be extracted from underground.
Its exploration and development operations span energy products including coal, oil and gas, and its mining includes copper, silver, zinc, molybdenum, uranium and iron ore.
BHP mines gold too, but it is part of a deeply diversified portfolio. That's not great if gold is soaring and you want a pure play on the yellow metal.
However, lately the broader inflationary trends that have emerged could lift the entirety of BHP's business in the months ahead
This provided you extra ways to capitalise as well as a hedge against going all-in on just gold if you're looking to reduce your risk.
BHP has been a successful mining business for decades. Paying shareholders attractive dividends has been one of its major attractions for a long time.
Analysts prefer to invest in companies like BHP Group because it not only has revenues, but also profits. But is the BHP share price worth looking at for income?
One of the most obvious pieces of investing advice is to buy low (and sell high). BHP shares are getting closer to their all-time high. Since the start of the year, BHP has risen almost 20 per cent.
While that may not strike you as a good time to buy, at the moment, things are looking strong for commodity prices, and the stock is expected to rise further still.
