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3 Gold Stocks to Buy on Inflation Concerns

Investors in the past several months have become increasingly worried about inflation. That is a real threat to equity prices, as well as the purchasing…

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This article was originally published by Investor Place

Investors in the past several months have become increasingly worried about inflation. That is a real threat to equity prices, as well as the purchasing power of dollars. However, that doesn’t mean investors have no way to benefit. Commodities tend to perform well on an absolute and relative basis during periods of higher inflation, and in this article, we’ll take a look at the case for gold stocks.

We’ll first examine the recent spike in inflation, what that could mean for gold stocks, and three examples of gold stocks we like today.

Inflation, as measured by the Bureau of Labor Statistics, has been on the march higher for all of 2021. The combination of pent-up demand from 2020’s recession, as well as continued shortages in raw materials, labor at factories to produce goods, freight and trucking shortages, and the like, have combined to produce rapidly increasing prices for a wide variety of goods. Energy has been hit with some of the same factors, and as a result, oil and gas prices are much higher than they were a year ago.

All of this means that, all else equal, a dollar has less purchasing power than it did a year ago, and that is generally good for commodities. Within the commodities group, precious metals tend to see not only rising prices from inflation, but additional demand from the safe-haven trade given gold and silver are seen as stores of value.

In short, this means that investor demand for gold in particular tends to rise during inflationary periods as a hedge against rising prices.

The price of gold and other precious metals is denominated in U.S. dollars, so if the U.S. is experiencing inflation, it takes more dollars to buy the same amount of gold. In other words, the price of the asset rises.

Here are three gold stocks we think are well positioned for this to play out:

  • Royal Gold (NASDAQ:RGLD)
  • Gold Resource Corp. (NYSEAMERICAN:GORO)
  • Franco-Nevada Corp. (NYSE:FNV)

Gold Stocks: Royal Gold (RGLD)

Source: aerogondo2/ShutterStock.com

Our first stock is Royal Gold, a company that acquires and manages precious metal streams and royalties. Instead of mining physical gold from the ground itself, Royal Gold acquires the rights to the royalties from mines that other companies are physically developing. It primarily generates revenue from gold, silver, copper, nickel, zinc, lead and cobalt.

The company owns interests in almost 200 projects around the world. Royal Gold was founded in 1981, generates about $700 million in annual revenue, and trades with a market capitalization of $7 billion.

We like Royal Gold because it has shown tremendous earnings growth in the past few years, averaging better than 9% annually in the past decade. In the last five years, that number is a staggering 29% off what was a very low base set while metals pricing was relatively low.

Royal Gold benefits tremendously from higher precious metals pricing given its costs are largely fixed. Since it is not mining the metal itself, its right to acquire royalty is already priced up front, so higher prices on the back end when it is time to sell generates additional profit margin. The company has seen strong organic growth due to this operating leverage, and it has been busy acquiring new projects as well. We see 4.5% annual growth going forward from this year’s high base, and we see the company’s impressive 20-year dividend increase streak continuing indefinitely.

Gold Resource Corp. (GORO)

A gold bar along with some coins made of precious metals. gold stocksSource: allstars / Shutterstock.com

Next up is Gold Resource Corp., a company that explores for, develops, produces and sells gold and silver in Mexico and the U.S. To a lesser extent, the company also generates revenue from copper, lead and zinc. Gold Resource’s primary project is Aguila, which has 18 mining concessions in Oaxaca, Mexico.

Gold Resource was founded in 1998, generates about $120 million in annual revenue, and trades with a market capitalization of $170 million.

Gold Resource recently spun off its mining unit in Nevada, and is consequently solely focused on its operation in Oaxaca. Unfortunately, Gold Resource’s track record isn’t very strong, as it has seen earnings and indeed the share price fall sharply in the past decade.

However, we see strong earnings growth potential from this year’s low base, which we see as accruing from higher precious metals pricing, as well as production growth. Both of these should drive the top line higher and consequently, profits as well as the company experiences operating leverage over time.

Gold Stocks: Franco-Nevada Corp. (FNV)

gold stored in a vault to represent gold stocksSource: Shutterstock

Our final stock is Franco-Nevada Corp. a gold-focused royalty and streaming company that operates in the U.S., Latin America, Canada, Australia, Africa and Europe. Franco-Nevada operates in both mining and energy markets, with end products including gold, silver, platinum, oil, gas and natural gas liquids. The company was founded in 2007, generates about $1.3 billion in annual revenue, and trades with a whopping $29 billion market capitalization.

We expect solid 6.5% annual earnings growth for Franco-Nevada, which would come off of what should be record earnings for 2021. Like the others, Franco-Nevada produces a huge amount of operating leverage when end market prices are strong for metals, as they have been of late. It has a pipeline of new metals and gas royalties to grow the top line via higher volumes.

The company’s average growth rate over the past decade is in excess of 10%, so we see 6.5% as highly achievable, particularly if inflation does continue and we see persistently high metals and energy pricing. We like Franco-Nevada because it stands to benefit from two completely separate asset classes, both of which should do well in an inflationary environment.

Final Thoughts

While inflation has many negative impacts on investors, as well as consumers in their daily purchases, it can be a boon for certain sectors. We see precious metals companies as having the potential to reap significant benefits from an inflationary environment as pricing and demand for gold, in particular, should rise during such a period.

We’ve named three companies we like in the sector that all have reasonable valuations, strong growth prospects and pay dividends to shareholders. While precious metals companies carry with them their own set of risks, in environments such as the one we’re in today, they tend to do quite well and we see them as strong inflation hedges for investors.

On the date of publication, Bob Ciura did not have (either directly or indirectly) positions in any of the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Bob Ciura has worked at Sure Dividend since 2016. He oversees all content for Sure Dividend and its partner sites. Prior to joining Sure Dividend, Bob was an independent equity analyst. His articles have been published on major financial websites such as The Motley Fool, Seeking Alpha, Business Insider and more. Bob received a bachelor’s degree in Finance from DePaul University and an MBA with a concentration in investments from the University of Notre Dame.

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Author: Bob Ciura

Economics

Unemployment Falls to 4.2 Percent in November as Economy Adds 210,000 Jobs

The rise in the index of aggregate hours would be equivalent to more than 630,000 jobs with no changes in workweeks.
The post Unemployment Falls to 4.2…

The rise in the index of aggregate hours would be equivalent to more than 630,000 jobs with no changes in workweeks.

The unemployment rate fell 0.4 percentage points in November, even though the economy added just 210,000 jobs. The drop in the unemployment rate went along with an increase in the employment-to-population ratio (EPOP) of 0.4 percentage points, corresponding to a rise in employment of more than 1.1 million in the household survey. The unemployment rate had not fallen this low following the Great Recession until September 2017.

The 210,000 job growth in the establishment survey is slower than generally expected, but it is important to note that it went along with an increase in the average workweek. The index of aggregate hours in the private sector increased by 0.5 percent in November. This would be the equivalent of more than 630,000 new jobs, with no change in the workweek.

This fits a story where employers are increasing hours since they are unable to hire new workers. We are seeing a reshuffling of the labor market where workers are looking for better jobs and employers are competing to attract workers, especially in lower paying sectors.

Declines in Unemployment Largest for Disadvantaged Groups

Nearly every demographic group saw a drop in unemployment in November, but the falls were largest for the groups that face labor market discrimination. The unemployment rate for Blacks fell by 1.2 percentage points to 6.7 percent, a level not reached following the Great Recession until March 2018 and never prior to that time. For Hispanics, the decline was 0.7 percentage points to 5.2 percent.

The unemployment rate for workers without a high school degree fell by 1.7 percentage points to 5.7 percent. By contrast, the unemployment rate for college grads fell by just 0.1 percentage points to 2.3 percent, 0.4 percentage points above its pre-pandemic low. The 5.7 percent rate for workers without a high school degree is 0.7 percentage points above the pre-pandemic low, although the monthly data are highly erratic.

The unemployment rate for people with a disability fell by 1.4 percentage points to 7.7 percent, while the EPOP rose by 1.1 percentage points to 21.5 percent. The latter figure is almost 2.0 percentage points above pre-pandemic peaks, indicating that the pandemic may have created new opportunities for people with a disability.

Share of Long-Term Unemployment Edges Up

The share of workers reporting they have been unemployed more than 26 weeks edged up slightly to 32.1 percent. It had been falling rapidly from a peak of 43.4 percent in March. It was under 20.0 percent before the pandemic hit. On the plus side, the share of unemployment due to voluntary quits increased by 1.0 percentage points to 12.5 percent. This share is still low for a 4.2 percent unemployment rate, but the high share of long-term unemployed depresses the share attributable to quits.

Wage Growth Still Strong for Lower Paid Workers

The average hourly pay of production workers is up 5.9 percent year-over-year. It has risen at a 6.6 percent annual rate comparing the last three months (September to November) with the prior three months (June to August). For restaurant workers the gains have been even larger, with the average hourly wage for production workers up 13.4 percent year-over-year, although the annual rate of growth slowed to 5.7 percent comparing the last three months with prior three months. Wages for the lowest paid workers are far outpacing inflation.

Manufacturing and Construction Both Add 31,000 Jobs in November

This continues a pattern of strong job growth in these sectors. Employment in construction is now down 1.5 percent from pre-pandemic levels, while manufacturing employment is down 2.0 percent.

Employment Lagging in Hard Hit Sectors

By contrast, employment is still lagging in the hardest hit sectors. The motion picture industry shed 3,400 jobs in November. It is now down 21.9 percent from pre-pandemic level.

Low-wage sectors are clearly having trouble attracting workers. Nursing and residential care facilities shed 11,000 jobs in November. Employment is now down 423,700 jobs (12.5 percent) from pre-recession level, accounting for most of the drop in health care employment. Childcare lost 2,100 in November, while home health care lost 300 jobs.

Retail lost 20,400 jobs in November. Employment in the sector is now down 1.1 percent from pre-pandemic levels; although the index of aggregate hours is up 1.1 percent.

Restaurants added just 11,000 workers, while hotels added 6,600. However, the index of aggregate hours for the leisure and hospitality sector (which comprises the two industries) rose 0.6 percent. This corresponds to a gain of almost 800,000 jobs with no change in the length of the workweek.

State and Local Governments Shed Another 27,000 Jobs

State and local government employment is now down 951,000, or 4.8 percent from pre-pandemic levels. This is almost certainly a supply side story, where these governments cannot easily raise pay to compete with the private sector in attracting workers.

Overwhelmingly Positive Report

This is another overwhelmingly positive report. The unemployment rate is more than a full percentage point lower than what CBO had projected before the passage of the American Recovery Plan. The most disadvantaged workers are seeing the greatest benefits in pay and employment opportunities. The economy looks to be very strong as long as another surge in the pandemic doesn’t derail it.

CEPR produces same-day analyses of government data on employment, inflation, GDP and other topics.
Follow @DeanBaker13 on Twitter to get his quick-take analysis of government data immediately upon release.
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The post Unemployment Falls to 4.2 Percent in November as Economy Adds 210,000 Jobs appeared first on Center for Economic and Policy Research.


Author: Karen Conner

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Economics

NFP React: Stocks lower after soft NFP report and Omicron jitters, No one named an FX manipulator

US stocks declined after a soft employment report and as traders remain on edge over the uncertainty with the Omicron variant. The next couple of weeks…

US stocks declined after a soft employment report and as traders remain on edge over the uncertainty with the Omicron variant. The next couple of weeks will remain volatile as the focus falls on the latest inflation report, the December 15th FOMC meeting, and further clarity on the impact with the Omicron variant. 

A record ISM Services reading did not excite traders, perhaps they focused more so on the supplier deliver delays, wage increases, and labor shortages. Technology stocks are getting hit hard as Facebook, Microsoft, and Square sell-off.  Didi shares fell on delisting plans and that raised the risk that other Chinese companies would follow.  

NFP

The US economy is adding jobs at a slower pace as employers are starting to have success luring people back to the labor force. If wages continue to rise, that will be the key for companies to reach their hiring targets. 

The November employment report showed US employers added 210,000 jobs, a miss of the 550,000 consensus estimate and well below the upwardly revised prior reading of 546,000 jobs. A headline miss with the nonfarm payroll report, may be mostly attributed to seasonal factors. The underlying components make this labor market report not so bad as people are coming back to the labor force, with the participation rate improving from 61.6% to 61.8%.

Wage pressures may be slowing as average hourly earnings dipped in November from 0.4% to 0.3%, but some of that could be attributed to the weakness in lower paying hospitality jobs. 

The Fed may view this as a positive employment report as minority unemployment improved significantly and the participation rate is now only 1.5 percentage points lower than in February 2020. Fed rate hike expectations are settling around two rate hikes next year. The headline jobs miss takes away momentum from an accelerated tapering but allows them to increase the taper pace by $5-10billion to the monthly pace. 

FX

The Treasury has placed 12 countries on a foreign exchange watchlist, bringing back China to the list, while adding Japan, Switzerland, and Germany.  The Treasury refrained from calling any country a currency manipulator, but both Vietnam and Taiwan will get enhanced analysis.


Author: Ed Moya

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Economics

Commodities and Cryptos: Oil rallies, Gold holds onto gains post NFP, Bitcoin hovers

Oil Crude prices extended gains after a mixed payroll report showed the labor market recovery is moderating but still headed in the right direction. …

Oil

Crude prices extended gains after a mixed payroll report showed the labor market recovery is moderating but still headed in the right direction.  The Omicron variant continues to be the key to short-term crude demand outlook and the latest updates have been mixed.  A South African study showed that Omicron reinfection risk is 3X higher.  The study of 2.8 million positive COVID samples in South Africa showed the Omicron mutation has a substantial ability to evade immunity from prior infection.  As Omicron spreads across the US, energy traders can’t forget about Delta as hospital admissions are increasing across 39 states. 

The aftermath of the OPEC+ meeting on output has many traders believe that if Omicron poses a bigger risk to the short-term crude demand, that would be met with a quick response of production cuts.  

Gold

Gold prices initially popped after a big headline jobs miss lowered the chances that the Fed would double the taper speed at the December 15th FOMC meeting, which would also push back expectations for that first Fed rate hike.  After traders processed the entire employment report, they realized it was not as bad since the participation rate rose sharply with both black and Hispanic unemployment also improved significantly.

Gold is still near one-month lows as markets continue to anticipate two Fed rate hikes next year, which should keep the dollar in demand.  Even as the Fed seems poised to wrap up tapering around the start of the first quarter, traders are not confident on when real yields will turn positive and that should be a primary driver for gold to rally after Wall Street confidently fully prices in the first couple of Fed rate hikes.  Leading up to the December 15th FOMC decision, gold should consolidate between $1750 and $1800 as next week’s inflation report doesn’t come with an extremely hot inflation report that includes a reading of 7% or higher. 

Bitcoin

Bitcoin is in ‘no man’s land’ right now and that does not seem to be changing anytime soon.  The long-term bullish case remains intact but prices seem poised to consolidate between $52,000 and $60,000.






Author: Ed Moya

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