Written by: Steve Best
With the second quarter of 2020 now behind us — a quarter, with no hyperbole, that was unlike any in my lifetime, investors should be closely assessing the single greatest threat to their portfolio, the coronavirus pandemic.
The US is either in the throes of a second wave of COVID-19 — an infection that has claimed the lives of over 500,000 people already — or is still suffering from the devastation of a stubborn first wave.
According to an analysis by Reuters of data from the COVID Tracking Project, there was a 46% increase in new cases of COVID-19 in the week ended June 28 compared to the previous seven days, with thirty-one states, mostly in the West and South, reporting increases.
Despite what some of our government leaders have been saying, the growth in cases isn’t simply about increased levels of testing. The issue is clearly community spread, as evidenced by the dramatic increase in positivity of test rates.
Twenty-one states reported positivity test rates above the 5% level that the World Health Organization has flagged as concerning. The highest positivity test rates were in Arizona with 24%, Florida with 16% and Texas, Nevada and South Carolina with 15%.
What happens to the economy if this virus continues to grow unchecked? Can we withstand another series of business lockdowns across the country? Where would the stock market be if the Fed hadn’t been printing money continuously for months? What happens when inflation rears its ugly head?
Your portfolio should have gold exposure in times of uncertainty
The argument for being invested, directly or indirectly, in gold remains strong, perhaps stronger than it’s ever been for today’s generation of investors.
Gold mining stocks are perhaps the simplest way for most individuals to gain exposure to the precious metal, and while they come with more risk than physical gold, I think the risk-reward proposition is favorable. As Warren Buffett said, “Bullion produces no income,” and I prefer the upside potential of companies actively in the business of maximizing profits for their shareholders.
Large cap, mid cap and small cap plays
I’ve been following three stocks across a range of market caps that I think are worth close attention, depending on your individual appetite for risk.
Among the large caps, I like Wheaton Precious Metals. The current price of $42.40 on the NYSE gives it a market capitalization of $19.7 billion. Wheaton is offers investors exposure to gold without the direct risks of mining operations. Rather, Wheaton is one of the world’s largest precious metals royalty and streaming companies.
The company provides upfront working capital to mining companies in exchange for the right to purchase all or a portion of the precious metals or cobalt produced by the mines. The company has agreements with 20 operating mines and nine development stage projects on three continents.
Wheaton’s production profile is driven by a portfolio of low-cost, long-life assets, including a gold stream on Vale’s Salobo mine and silver streams on Glencore's Antamina mine and Newmont Goldcorp's Peñasquito mine.
Yamana Gold is the mid-cap play on my list, trading on the NYSE at $5.42 for a market cap of $5.2 billion. The company is a significant gold and silver producer with a portfolio of development stage properties, exploration properties and land.
Yamana owns 100% of the Jacobina mine in Brazil, Cerro Morro in Argentina and El Peñón and Minera Florida in Chile. The company also owns 50% of the Canadian Malartic mine in Quebec.
The company has a track record of consistent metal production, strong balance sheet and increasing free cash flows. Yamana has increased its dividend three times in the past year, cumulatively increasing it by 210%.
For those of you with a higher risk-reward tolerance, my microcap selection is Palayan Resources. The company trades on OTC Markets at $1.60 per share, for a market capitalization of $48 million.
Palayan Resources is an exploration and development stage company seeking world-class gold deposits. The company has chosen to focus on opportunities in the Republic of Kazakhstan, the former Soviet republic, and to this end, recently acquired land rights and underground mineral rights to the Kokkus Project, a gold and copper deposit in Kazakhstan.
While it is still considered a frontier market, Kazakhstan is the world's leading producer of uranium, a top ten producer of copper and a major producer of gold and other minerals. The country has not had significant modern mineral exploration for 30 years, and Palayan Resources believes there is significant potential for large mineral discoveries in the near future.
Gold stocks could be a safe haven from the coronavirus storm
I think the performance of the tech-driven US stock market is closely correlated with the progression of this virus, and all signs point to a long, difficult battle for individuals as well as local and federal governments. It’s a recipe for a difficult-to-predict investment horizon, and in times like these, it’s important to ensure that some part of your portfolio is weighted in gold. Depending on your desired level of risk assumption, Wheaton Precious Metals, Yamana Gold and Palayan Resources should be on your radar.