If you listen to the talking heads on CNBC, gold's move from $1,230/oz. to $1,280/oz. since last December occurred despite the threat of at least one, and possibly two, interest rate hikes in 2017.
This reasoning has resulted in the idea that gold prices will have to decline from current levels unless the Fed fails to raise interest rates. And frankly, unless the United States enters a recession, the likelihood of at least one more rate increase in 2017 is inevitable.
Gold prices correlate more to 'real' interest rates than to 'nominal' rates. Real interest rates are nominal rates less the rate of inflation. In simple terms, a nominal interest rate of 3% yields a real rate of 1% if the inflation rate is 2%.
Now, nominal interest rates are likely to rise in 2017. But real rates are not, since expectations are for higher inflation, not less. What this means is that even if the Fed attempts to 'normalize' them, real interest rates have likely already hit their highs -- meaning that gold prices are not likely to go significantly lower from here.
In fact, given that the current economic recovery is already the second longest economic expansion in U.S. history, odds are that the economy will go into a recession long before the Fed is able to raise rates to their target level. Simply put, this means the gold prices are going higher.
And that means there are profits to be had for prudent gold investors.
Huge Gold Reserves
One top gold stock that should be on your radar is NovaGold Resources (NYSE: NG). NovaGold has huge gold and copper projects in Canada and Alaska.
Their flagship project, Donlin Gold, is a 50/50 joint venture with Barrick Gold (NYSE: ABX) in Alaska. The Donlin project has proven gold reserves of 34 million ounces. Additionally, Donlin contains another 46 million ounces that are "measured and indicated." And at approximately .07 ounces (1.98 grams) of gold per ton, it's twice the worldwide average grade of all gold mines.
The company recently completed its public-comment period for its draft Environmental Impact Statement (EIS). The EIS explains the environmental impact of the company's operations. The company expects to publish the final IES statement by fall.
This means production can begin soon, yielding more than 1 million ounces of gold annually over the next three decades. That makes this company a buy-and-forget stock that could easily rise to $40 in the next decade.
A Gold/Silver Play
Another stock that should be on your radar is Pan American Silver (Nasdaq: PAAS). The company operates mines in Peru, Mexico, Argentina, and Bolivia.
Last year, the company produced more than 25 million ounces of silver and another 184,000 ounces of gold. The company reserves include up to 285 million ounces of silver and 2 million ounces of gold.
Pan American's largest mine (by production) is La Colorada in Mexico, which produced about 6 million ounces in 2016. But the company expects to increase production by two-thirds due to a major expansion of this mine -- which accounts for 47% of the company's revenue.
Another project in Argentina could portend further improvements in revenue growth, dwarfing the year-over-year (YOY) operating cash flow jump of 141% in 2016. Pan America's Navidad project in Chubut Province sits on one of the largest undeveloped silver deposits in the world.
Unfortunately, government legislation has prevented the company from accessing the rare metal. But that's about to change with the election of pro-business president Mauricio Macri. Macri supports the project and has introduced policies to allow mining operations.
My final top gold stock pick isn't actually a gold mining company.
Royal Gold (Nasdaq: RGLD) enters into "streaming" agreements with actual mining companies and pays to help support their operations. In exchange, Royal Gold gets some of the gold. Moreover, gold streaming companies pay prices substantially below the spot rates for gold, making the 'margins on these agreements very attractive.
Royal Gold's portfolio consists of nearly 40 operating mines and another 22 under construction. As you can see from the chart below, the stock has been on a tear since the beginning of last year.
The company closed 2016 with record revenue and strong operating cash flows. Revenues increased by almost 10%, while its EPS grew by 87%. Better yet, this is a company with a solid history of performance -- illustrated by its 16 straight dividend increases.
The Midas Touch
Given the likelihood that real interest rates will remain relatively flat, gold's recent run-up should remain stable. When you consider the length of the current economic expansion and the prospects of ever-growing deficits, gold is going higher. And those who can see into the future will, indeed, have the Midas touch.
Risks To Consider: Real rates could conceivably begin rising if the Fed is unsuccessful in meeting its inflation target. That seems a long shot, though, given the greater likelihood that fiscal and monetary issues will continue putting upward pressure on inflation.
Action To Take: Buy shares of NG up to $5.50/share. Buy shares of PAAS up to $20/share. Buy shares of RGLD up to $80/share. Mitigate the risk to your portfolio by using no more than 2% of your portfolio to any one position. Use a 50% trailing stop loss on each position.
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