Gold has seen it worst start to a year in three decades, breaking below its 200-day moving average, reportedly reacting in part to higher Treasury yields, asserts Adrian Day, money manager and editor of Global Analyst — and a participant in the MoneyShow Virtual Expo coming April 20-22. Register here for free.
This comes against a background of expectations of an economic rally as progress is made in Covid vaccinations. However, this should be put in context.
While there has been a steepening in the yield curve, real yields — after inflation — remain negative. Yields are up with inflation expectations, and that is positive for gold.
At the same time, the central factor that drives gold, global liquidity, remains very strong with no indication of a reversal in the foreseeable future, quite the opposite! I think we are simply seeing normal market action.
I venture that we are very close to the low and gold will resume its recovery, which started at the end of 2015, very shortly. It had simply moved too far, too soon, and needed time to consolidate.
Many leading gold stocks are back to early April 2020 levels, quite astonishing given the higher gold price since then, and the strong profits being reported. There is no clearer example of the disconnect than Barrick Gold (GOLD), the second-largest gold miner in the world.
Barrick reported its fourth-quarter and annual results and it is firing on all cylinders. It was also a bit of a victory lap highlighting the achievements since the merger with Randgold two years ago, when Bristow took over the company. Yet the stock fell in response.
CEO Mark Bristow called it “a year of delivery amid unprecedented challenges.” It achieved its targets for 2020, after fourth quarter production increased 4.4%, largely due to good results from Pueblo Viejo and the ramp-up at Bulyanhulu. Costs also met guidance, with record free cash flow.
For the year, the company produced 4.7 million ounces at cash costs of $699, and “all-in sustaining costs” (AISC) of $967. That cash flow plus asset sales, $1.5 billion since the merger, make the company net cash positive at the end of the year. Considering there was over $4 billion of debt two years ago, this is a solid achievement.
The strong financial position has enable Barrick to triple its dividend in the last two years; while maintaining the quarterly for the next payment, it announced a special return of capital of $750 million.
This payment, to be made in three tranches this year, which equates to 42 cents per share, compares with a total dividend of 31 cents for 2020. The regular dividend comes from free cash flow, while the return of capital comes from asset sales.
Barrick is best in class, with top management, rock-solid balance sheet, world-class assets, a strong pipeline, and low valuations. It is trading at 1.5 times book and 10.5 times free cash flow. These multiples are lower than the entire XAU index, which trades at over 2 times book and has a free cashflow multiple of 24 times.
The yield of 1.8%, not including the return of payment this year, is more than twice that of the XAU (and higher than the S&P). Barrick is a strong buy.
