A renewed upward trend in gold has ushered in predictions of an all-time high. Typically seen as a safe haven in times of uncertainty, gold’s recent rise comes as we near the end of this interest rate hiking cycle.
Gold is a unique precious metal known for its extreme durability, malleability, and heat and electricity conduction properties. Most investors are familiar with gold as an input for jewelry-making. The highly-tracked commodity is up about 13% this year.
While gold has underperformed stocks as an asset class over the long-term, there are significant periods of time when this shiny metal has outperformed by a wide margin. As we can see below, in the ten-year period ending August 2011, gold rose 562% - an annualized return of nearly 21% per year. Over the same time period, the S&P 500 delivered a total return of just 30% - including dividends!
Image Source: StockCharts Is the Shiny Metal a True Inflation Hedge?
Gold didn’t quite live up to its reputation as a hedge against inflation last year. Generally speaking, precious metals have historically been viewed as vehicles to protect us from inflation and currency devaluation. Yet gold was relatively flat in 2022 amid a 40-year high in inflation, putting a big dent in the inflation hedge theory.
Changing intermarket relationships are an unpredictable risk, such as inflation not being a return driver for gold. But gold faced one major headwind last year that has now reversed course: a strong U.S. dollar. Amid rising interest rates, the dollar hit a multi-year high in 2022 relative to a basket of other currencies. As the outlook for interest rates has come down (with cuts now being anticipated), the dollar has begun to weaken.
The U.S. dollar went off the gold standard in 1971, and despite some short-term periods of strength, the dollar has been in a long-term downtrend ever since. The U.S. is the world’s largest debtor nation. As U.S. debt and deficits continue to balloon, they exert downward pressure on the dollar.
Gold and the dollar normally move in opposite directions; this inverse relationship is vital to understand. Gold protects investors from a falling dollar and can help us guard our wealth and maintain purchasing power as the long-term slide in the dollar continues. This dynamic is why gold has been known as a store of value and safe haven against the erosion of fiat currencies.
Sticking with the timeframe from our last example, note the inverse relationship between the U.S. dollar and gold prices:
Image Source: StockCharts Gold Nears Long-Term Breakout Level
Shifting to the present, a falling dollar now presents a major tailwind for gold prices moving forward. Gold is on the precipice of a major long-term breakout, looking ready to ultimately surpass the August 2020 all-time high of $2,089/oz.
A recent Financial Times article stated, “Central banks are scooping up gold at the fastest pace since 1967, with analysts pinning China and Russia as big buyers in an indication that some nations are keen to diversify their reserves away from the dollar.”
Mining stocks stand to benefit from higher gold prices. The Zacks Mining – Gold industry group currently ranks in the top 32% out of approximately 250 industries. Because it is ranked in the top half of all Zacks Ranked Industries, we expect this group to outperform the market over the next 3 to 6 months.
Historical research studies suggest that approximately half of a stock’s future price appreciation is due to its industry grouping. In fact, the top 50% of Zacks Ranked Industries outperforms the bottom 50% by a factor of more than 2 to 1. By targeting stocks contained within the top industry groups, we can dramatically improve our odds of success. Note the favorable earnings metrics for this group below:
Image Source: Zacks Investment Research
Alamos Gold (
AGI Quick Quote AGI - Free Report) is one stock in this industry that is engaged in the acquisition, exploration, development, and extraction of precious metals in Canada and Mexico. AGI primarily explores for gold and silver deposits; the company operates three mines in North America.
AGI is a Zacks Rank #2 (Buy) stock. The company has exceeded earnings estimates in each of the past four quarters, with an average earnings surprise of 25.57% over that timeframe. The stock is currently breaking out and has surged nearly 45% year-to-date.
Analysts covering AGI are in agreement and have raised 2023 EPS estimates by 23.26% in the past 60 days. The Zacks Consensus Estimate now stands at $0.53/share, reflecting potential growth of 89.3% relative to last year.
Image Source: Zacks Investment Research Bottom Line
As the U.S. dollar reverses course from last year’s strength, the stage is now set for gold to breakout of a long-term base. Gold could very well be in store for a period of outperformance, similar to the 2001-2011 decade.
The best way to take advantage of this move is via gold exploration and mining stocks. And with the help of our team here at Zacks, you’ll be ready to capitalize on the opportunity by uncovering leading stocks like AGI.