We’re in unprecedented times thanks to the novel coronavirus. That goes double for investors, as they try to figure out what stocks and assets are worth owning at this stage of the game. With gold always a fixture, are gold stocks worth owning at this point?
That answer really depends on the situation.
Overall, I am bullish on gold, but there are doubts. With so many other investors watching the yellow metal and seemingly bullish on it as well, it’s a bit concerning. Anytime there is too much focus on one asset or stock is exactly when it seems to disappoint the majority.
It All Starts With Gold
Before we talk about gold stocks, we have to talk about gold. Because you can’t be bullish or bearish on the group without having an opinion on the metal first. It’s like judging energy producers without having studying oil. The commodity drives the miners’ business, so we better have a thesis on the yellow metal.
Under the current circumstances, how can we not like gold? First, gold is viewed as a safe haven, along with bonds. But with bonds paying so little in the way of interest — 10-year Treasury bonds yield just 0.65% — gold may start to get more attention.
Rather than simply speculate on safe-haven plays, there’s another reason to like gold. The Federal Reserve, European Central Bank, and global central banks around the world are resorting to stimulus to offset economic setbacks from the coronavirus.
When central banks print money, it devalues the currencies’ worth. Thus, it makes assets like gold more valuable. It won’t happen overnight, but as the Fed and others look to stimulate, it seems like gold will have to be an eventual beneficiary. One of Wall Street’s most famed traders agrees too — well, sort of.
Paul Tudor Jones recently warmed up to bitcoin, saying the currency reminds him of gold a few decades ago. He said:
It has happened globally with such speed that even a market veteran like myself was left speechless…We are witnessing the Great Monetary Inflation — an unprecedented expansion of every form of money unlike anything the developed world has ever seen.
He considered gold, Treasuries, and certain stocks. In the end he settled on bitcoin, which he referred to as the “fastest horse” in the group.
How to Play Gold Stocks
Investors have essentially three takeaways with gold.
First, they can be bullish on the yellow metal, believing it will act as a safe haven in our current environment and as a store of value as central banks pump out cash. Second, they can bearish, believing that those are not worthy catalysts or that too many eyes are on the metal.
Finally, they can be without opinion, opting to pass on a position in gold in favor of assets they understand better.
For those that are bullish, they can consider owning physical gold. They can also consider buying the SPDR Gold Trust ETF (NYSEARCA:GLD). Beyond that, they might consider owning gold stocks too.
I like both Barrick Gold (NYSE:GOLD) and Newmont Mining (NYSE:NEM). Both stocks have had explosive moves off the lows. While they seem to be losing some momentum, I think it’s simply some consolidation after a powerful move. We’re seeing similar consolidation (on a less-powerful move) in actual gold prices.
Those who don’t like single-stock exposure can consider the VanEck Vectors Gold Miners ETF (NYSEARCA:GDX). Incidentally, Newmont Mining and Barrick Gold are the top two holdings in the ETF, with a 15.5% and 14.8% weighting, respectively.
Keep in mind, if volatility really picks up, safe-havens may temporarily be out of favor. Bonds, gold and other assets all felt the pressure when stocks were tanking in March. It was likely that investors had to sell others assets (like these) to meet margin calls and raise liquidity.
Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell. As of this writing, Bret Kenwell is long GLD.