The gold spot price is approaching a record high as investors seek an inflationary hedge. And as Russian gold stocks crater, Barrick Gold's long-term prospects continue to brighten.
Gold stocks have underperformed in recent years compared to sectors such as technology and healthcare. But now the financial landscape is changing. Across the developed world, excessive government spending designed to stave off a covid-19 pandemic-inspired economic catastrophe has seen inflation soar to multi-decade highs. In the UK alone, the Consumer Prices Index inflation rate is at 5.5%. And Paul Dales of Capital Economics predicts it could hit 7.9% in April.
In the Bank of England’s latest Monetary Policy Committee meeting, it argued ‘most of the causes of the current high rate of inflation won’t last…it’s unlikely that the prices of energy and imported goods will continue to rise as rapidly as they have done recently.’ But it could be eating its words shortly.
Gold price: Russia invades Ukraine
Russia’s invasion of Ukraine has sent Brent Crude to a 14-year high of nearly $120. And JP Morgan predicts the benchmark could rise to $185 per barrel if the Russian supply hit continues. Escalating sanctions against and from Russia have the potential to send inflation in the UK significantly higher than previously predicted.
When inflation rises, it’s usually accompanied by capital flight to gold as an inflationary hedge. In July 2020, the Gold Spot struck a record $2,037/oz as pandemic-panicked investors deserted stocks for the safety of the precious metal. After dipping to $1,729/oz in August 2021, gold has now recovered to $1,948/oz. And with 70% of IG clients currently long on the metal, it could strike a new record soon.
Moreover, Russia’s invasion is also weakening global supply whilst increasing demand. Last year, Fitch Solutions Country Risk & Industry Research predicted Russia’s gold production would grow 3.7% annually until surpassing China as the global gold producing leader in 2029.
But Russia’s two largest gold miners, Polymetal International and Polyus, are now seeing their share prices collapse. As Russian gold becomes undesirable to vast swathes of potential buyers, the remaining global supply is likely to become more expensive, which will be good news for gold stocks without exposure to Russia.
Best gold stock to watch
Barrick Gold (NYSE: GOLD) is one of the largest gold miners in the world. Its share price is up 27% over the past month to $24.44, as it closely tracks the gold spot price. And the miner is also up 25% over the past year, and 34% over the past five years.
This consistent long-term price gain is made possible by its strategy of only exploring and developing mining projects with long lifespans and high profit margins.
In last month’s 2021 full-year results, the miner reported ‘production in line with guidance for a third consecutive year’ while its Nevada gold mines achieved their highest quarterly production ever. And despite depleting global gold reserves, the company claimed that its ‘reserves more than replaced depletion at better grade’ with its ‘reserve replacement and 10 year plan reinforced by a robust pipeline.’
The company maintained net cash of $130 million after a record $1.4 billion distribution to shareholders in 2021. Moreover, it’s announced a share buyback of up to $1 billion, and a dividend increase of 11% compared to the previous base quarterly dividend to 10 cents per share.
Keybanc Capital Markets analyst Adam Josephson believes competitor ‘benefited from its capital allocation policy over the past year (in terms of its stock performance), and we think Barrick is trying to receive similar credit.’ Newmont’s share price shot up 35% over the past year.
CEO Mark Bristow does not believe the current share price reflects the company’s value, arguing ‘Barrick is clearly the stand-out in its sector. We have what is undoubtedly the best asset base…a long record of exploration success and a high-quality target pipeline. In an industry running out of raw material, we keep expanding our reserves.’
The Ukraine crisis is adding fuel to an already hot inflationary fire. As the gold spot price rises, Barrick Gold could be one of the best gold stocks for an inflationary hedge.
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