Barrick Gold (TSX:ABX)(NYSE:GOLD) is down more than 25% from its 2020 highs. The slide followed a pullback in the price of gold, but investors with a bullish view on precious metals wonder if Barrick Gold stock is simply too cheap to ignore today.
Silver caught the eye of speculators in recent days. The precious metal soared on hopes that a buying frenzy will create a short squeeze in the silver market and drive the price significantly higher. Pundits say the trend could play out for some time and the other precious metals might benefit from the new interest.
Gold is a much larger market, so the same strategy likely won’t work, unless major institutional money got involved alongside the army of retail investors that succeeded in creating short squeezes in a number of stocks in recent weeks. A parabolic surge in gold shouldn’t be expected, but a steady move higher is definitely possible, and the new focus on precious metals could be the catalyst.
Gold trades near US$1,850 per ounce at the time of writing. The yellow metal topped US$2,000 in August. Even after the pullback from the 2020 highs, gold is still up significantly over the past two years. Gold traded near US$1,300 per ounce in February 2019.
The ongoing strength makes sense. Gold tends to rise when investors seek out protection against financial risk or as a hedge against inflation. Both those scenarios could provide tailwinds for gold in 2021. The U.S. stock markets continue to trade at expensive multiples when compared against historical averages. This suggests a meaningful and healthy correction could be on the way.
On the inflation front, analysts expect financial stimulus efforts and a strong economic rebound in the back half of 2021 to push inflation towards 2% by the end of the year. The U.S. Federal Reserve appears willing to let inflation run higher than its target rate before raising interest rates to stem the rise. No rate hikes are expected until 2023. A surge in inflation above 2% in 2022 could trigger more gold buying.
Interestingly, gold also benefits when interest rates remain low and when the U.S. dollar weakens against a basket of key currencies. Pundits predict the dollar index could slide as much as 20% in the next 12 months. That should be bullish for gold prices.
Barrick Gold generates strong free cash flow at current gold prices. The company made great progress in recent years on its efforts to reduce debt and streamline operations. In addition, the merger with Randgold created a gold mining giant with five of the top 10 mines on the planet.
Barrick Gold raised the dividend by 12.5% when it reported Q3 2020 results. This is the third dividend hike in 12 months. The company hit its production goals last year, despite the pandemic challenges. Barrick produced 4.8 million ounces of gold in 2020.
What about copper?
Barrick gold is best known for its gold mines, but the company is also a major copper producer. Copper prices soared in 2020 to seven-year highs. The global boom in fiscal stimulus measures should drive strong copper demand and higher prices in the next few years. Copper is a key component in the manufacturing of solar panels, wind turbines, and electric vehicles.
Barrick gold trades below $30 per share, compared to the 12-month high around $40. The stock appears cheap at existing gold prices. A gold move back to US$2,000 by the end of 2021 wouldn’t be a surprise and Barrick gold stock could easily retest the 2020 highs.
If you like the long-term gold story, Barrick Gold deserves to be on your buy list.
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