Maxim Manturov, Head of Investment Advice at Freedom Finance Europe, explores why now is a good time to invest in gold.
The risks associated with stronger sanctions against Russia by the West have pushed investors and traders to look towards safer assets. Gold is one of them. Since the beginning of the year, the metal has increased 7.5% in value, rising to £1,466 an ounce.
While the volume of gold in the global economy is limited, an increase in demand for this asset has sent stock prices soaring. In turn, the metal is expected to generate substantial returns in 2022, as it is seen as a hedge against major economic and geopolitical disruptions.
For investors looking to protect their investment portfolios, analysts have broken down three potential investment ideas with different risk levels.
What is driving the industry growth for gold?
Demand for gold tends to rise due to global political confrontation. In turbulent times, money depreciates, companies’ shares decline in value, and virtual currencies become unstable. In such cases, investors turn to gold, which is an asset that does not change and grows in the long term.
While experts say that gold does not protect against inflation, the reality is different. The five-year correlation between gold prices and the CPI (Consumer Price Index) is 0.79, reflecting a stable long-term relationship. If inflation is persistent, it will lead to higher gold prices. As a result, the number of gold miners across the globe will also rise.
For example, the policies of the Federal Reserve System (Fed) and other central banks under Covid-19 caused a wave of liquidity. Inflation, which was initially thought to be temporary due to supply problems throughout the pandemic, turned out to be a long-term structural issue for the global economy. The consumer price index rose to its highest level in almost 40 years and investors increasingly looked towards gold as a safe investment.
If you want to learn more about palladium, including an in-depth analysis into its supply and demand, check out this comprehensive guide by The Assay.
Three gold investments to watch
1. VanEck Gold Miners ETF Units (GDX.US)
The VanEck Gold Miners exchange-traded fund (ETF) tracks the NYSE Arca Gold Miners Index (GDMNTR). This index covers 50+ companies from 9 different countries, the top 5 companies being: Newmont Corporation, Barrick Gold Corporation, Franco-Nevada Corporation, Agnico Eagle Mines Limited, and Wheaton Precious Metals Corp.
The VanEck Gold Miners ETF has £11.9 billion assets under management (AUM). With its entry price in shares sitting at £28.3, its target price of £34 means the company has a growth potential of 20% over the next 12 months.
Metal prices have already risen by 11% since the start of the year. Buying units of the VanEck Gold Miners ETF offers the potential to benefit overall from the upward trend in the industry. It is a risk-weighted investment.
2. Wheaton Precious Metals Corp. (WPM.US)
Wheaton Precious Metals Corp. is a multinational streaming company, which specialises in precious metals such as gold, silver, and palladium. Wheaton’s current portfolio includes 24 active mines and 12 projects under development. These assets have a useful life of more than 30 years.
Wheaton has an innovative streaming business model where it finances mining companies to develop and expand their projects. In return, the company receives the production of one or more metals at a discounted price. In addition, Wheaton generates income on rising metal prices, making it more attractive than other mining companies. The costs are predetermined and the average operating margin is 76%.
Wheaton’s increased financial performance and production volumes signify that this business is full of promise. Over the past three years, the corporation’s revenue has grown at an average rate of 15% – reaching £910 million in 2021.
The company also demonstrates improvement in its operating and net margins. Each estimate was up by more than 45% year on year (YoY). Net profit for the same period was £571.9 million. For 2021, free cash flow was at £333.3 million.
Wheaton’s current shares price is sitting at £36.29, while its target price is sitting at £45.45. In the period of 12 months, this means the company will potentially grow by 25.2%. Alongside this, the company shows exiting business growth, a strong balance sheet, high-profit margins, and efficient quality of capital structure management.
3. Hecla Mining Company (HL.US)
Hecla Mining acquires and develops mines, as well as sells gold, silver, lead, and zinc. The company and its subsidiaries supply precious metals internationally and to the US. Over the past year, Hecla Mining has derived a large proportion of its revenue from gold and silver sales – 42% and 34% respectively.
The business has accumulated impressive reserves of gold and silver in the last few years, which should also catch investors’ eyes. Silver reserves increased between 2020 and 2021 from 188 million ounces to 200 million ounces. As part of this, the company increased proven and probable reserves by 6%, or 11.5 million ounces, compared to 2020. For gold, proven and probable reserves increased by 14% from 2.4 million ounces to 2.7 million ounces. This helps to ensure the long-term sustainability of the company.
Between 2018 and 2021, the company showed significant business growth. Revenue growth during this time stood at an impressive 42.5%, with profits reaching £612.11million in 2021. In the same year, free cash flow was sitting at £85.61 million and Hecla posted a net profit of £25.51 million. In 2022, the growth rate of these indicators is expected to maintain this momentum.
Hecla Mining today is a low-cost, high-margin, high-growth company with an extremely healthy balance sheet.
