While stock markets have experienced wild swings in 2020, investors of the yellow metal have managed to generate market-thumping returns. As gold prices touched record highs a few months back, gold mining stocks have gained solid momentum as well this year.
There are several benefits of investing in gold mining companies instead of the commodity. One of the main reasons is the leveraged upside these companies offer when gold prices rise as they can increase production and grow revenue.
Why will gold prices rise in 2020 and beyond?
There are multiple growth drivers for gold prices to surge higher that include a low-interest-rate environment, quantitative easing measures, COVID-19 related uncertainty, and a sustainable bull market.
As interest rates are near record lows, the income investor is looking at other instruments to generate stable income. This means bonds are unlikely to outpace inflation rates making gold the most logical store of value.
In 2020, the COVID-19 pandemic disrupted the personal and professional lives of billions of people all around the world. Governments stepped in and offered financial benefits to boost the economy and increase consumer spending. These quantitative easing measures which will continue well into 2021 and weaken the U.S. dollar. Gold prices and the U.S. currency have an inverse relationship which makes the lustrous metal a top investment.
There may also be bullion shortages as the second wave of the dreaded virus in Europe and North America may result in production disruptions in core mining markets.
Another historic trend that supports an uptick in prices is that the gold bull market is a multi-year cycle. For example, gold prices soared by 600% between the end of 1999 and 2011. The recent uptrend in gold prices may easily continue in the upcoming decade and beyond.
Gold mining stocks are attractive investments
As mentioned earlier, investors can look to buy gold mining stocks instead of the physical commodity to take advantage associated with rising prices. Investors may also benefit from dividend payments a feature that is absent when you purchase physical gold.
Further, the management of gold mining companies can also adjust their output according to demand and overall market conditions. Over the last decade, several gold-mining companies have managed to strengthen their balance sheet by lowering debt and selling off non-core assets.
For example, SSR Mining (NASDAQ: SSRM) has four producing assets that can mine 780,000 gold equivalent ounces per year with an ASIC (all-in sustaining costs) of $900 an ounce. The AISC is the costs associated with mining an ounce of gold. So while gold prices were near $1,500/ounce, SSR’s net income would be $600/ounce. This net income figure was nearing $1,100/ounce when gold prices were $2,000/ounce.
SSR is expected to generate around $450 million in free cash flow in each of the next two years and is one of the top gold mining stocks right now.
Another mining company is Kirkland Lake Gold (NYSE: KL) which has a strong balance sheet and ended Q3 with $848 million in cash. Kirkland is debt-free allowing it to triple its quarterly dividend and repurchase $526.6 million worth of common stock.
Kirkland’s AISC stood at $886/ounce which is marginally lower than that of SSR’s. Kirkland Gold stock has returned 1,775% in the last five years. Comparatively, SSR Mining is up 260% since November 2015, easily outpacing the S&P 500 in this period.
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