Sep 02, 2017
What the Federal Reserve says and what the Federal Reserve does is not always the same thing. The central bank has thus far failed to raise interest rates as quickly as it had indicated last year, and now the market is starting to really doubt its credibility.
While Fed officials continue to stand by the view that we’ll have another rate hike in 2017 and three more in 2018, the market is telling a different story. According to the Fed Fund Futures, there is a 0% chance of a rate increase in September and only a 36.4% chance of one in December. What’s even more surprising is the fact that the first month with odds above 50% isn’t until June 2018.
But even though the Fed may not raise interest rates in the near future, the bank is still likely to start reducing its $4.5 trillion balance sheet by selling $10 billion a month in the form of Treasuries and mortgage-backed securities. And over time that monthly amount will increase. This boost in supply could push bond prices lower, which in turn would allow interest rates to rise.
The end result is bullish for gold stocks. They’ve been performing well in the low rate environment, so today I’d like to take a closer look at three that could continue to be winners as the Fed unloads its balance sheet.
1. Royal Gold (RGLD)
Royal Gold is a company that focuses on acquiring streams and royalty interest in precious metals mining. It doesn’t directly own any mines, but instead makes a steady stream of money by financing projects that are in the developmental or production stage.
RGLD recently released impressive numbers for fiscal 2017. Revenue came in at $441 million, up 23% from 2016 and the best on record, and net income increased 56% year-over-year, which was also a company best. Other annual records included cash flow from operations, volume of gold equivalent ounces and dividends paid.
The stock recently broke out to its best level since 2012, and I would consider a pullback to support in the high $80s a buying opportunity.
2. Franco-Nevada Corporation (FNV)
Franco-Nevada is similar to RGLD in that it does not own any gold mines and therefore relies on royalty and stream for income. The company has interests in gold mines, as well as silver, platinum, base metals, oil and gas.
FNV reported solid second-quarter earnings last month, and even though earnings only met analysts’ expectations of $0.25 a share and revenue was below predictions, the stock has continued to surge to new highs. It recently broke out on the chart, so I’d consider a pullback to the $80 area a good buying opportunity.
3. Kirkland Lake Gold (KL)
Kirkland Lake is an explorer and developer of gold properties, currently owning and operating five underground mines in Canada and Australia. Management has said that they are targeting gold production of 570,000-590,000 ounces in 2017.
On August 16, the $2.5 billion company up-listed to the NYSE from the over-the-counter (OTC) markets. KL has been on a big run this year, up about 125% so far, and it continues to climb to new all-time highs.
Like many junior gold miners, KL can be volatile. Therefore, I’d look for weakness to push the shares back toward $11.50 before considering them a buy.
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