How to Play the Coming Gold Supply Crisis

LONDON, June 27, 2017 /PRNewswire/ --

Growing geopolitical tensions and 'Trumpflation' have spurred a dramatic increase in safe haven demand, and the ongoing Bitcoin craze clearly proves it.

Bitcoin prices have more than doubled in the year-to-date, while those of its closest peer, Ethereum, are up an eye-popping 4,500 percent.

Yet, extreme volatility by digital currencies makes them a poor hedge against future uncertainties. Bitcoin has a downward deviation six times greater than gold's, making it extremely risky for use as currency.

Gold remains the pre-eminent and time-tested safe haven asset for hedging against macroeconomic upheavals. Companies in focus include large miners such as: Tahoe Resources Inc. (NYSE:TAHO), Goldcorp Inc. (NYSE:GG), Barrick Gold Corporation (NYSE:ABX), Agnico Eagle Mines Limited (NYSE:AEM), Franco-Nevada Corporation (NYSE:FNV)

Evidence keeps piling up: Future supply of the world's most important precious metal is now under threat. After years of falling gold prices, major miners everywhere have been forced to slash their exploration budgets, with many downsizing operations or completely shutting down.

Prior to the gold rally of 2017, gold prices had been falling since 2008 as economies around the world gradually improved in the post-financial crisis period, forcing producers to fold up operations. Even today, no new big mines are being developed across the world.

The spectacular collapse of South Africa's gold industry, formerly the world's largest, was the classic canary in a coal mine. At just 140 metric tonnes per year, the country's current production is a far cry of what it was a couple of decades ago.

The situation in South Africa foreshadowed a coming decline in global production.

Last year marked the first time that global gold output declined since 2008, with all major producers except China recording significant declines.

The fact that we are now past 'peak gold' is a criminally underreported phenomenon, and the situation is expected to worsen as the years roll on.

The sad fact of the matter is that we live on a small, finite planet, and it's just a matter of time before the gold market has to climb a major wall of worry in the form of small and dwindling supply.

Against this backdrop, here are our 5 picks to get into gold right now, whether you're looking for an entry point that offers outsized gains or a consistent dividend safe house:

#1 Tahoe Resources (NYSE:TAHO)

For Tahoe, the main attraction right now is dividend yield. This company is paying double its peers, and blows pretty much everyone else away. That's unusual in gold. But it's not that black and white. This stock hasn't done well over the past few years, and the declining price of silver has taken its toll. It's also had trouble in Guatemala, and it's suffering from high production costs due to a string of acquisitions. But still, even though some of its peers' stocks are doing better, Tahoe still has the highest dividend yield. So why is that?

Tahoe is trading at 9 times its cash flow-way below its closest rivals. If it were trading higher, its dividend yield would fall. But that's not the only reason. It's also simply got a better dividend policy from a shareholder perspective. It's fixed at $0.02 per share (per month) or $0.024 per share per year. So, the dividend isn't based on cash flow. You might think this would be a problem for Tahoe, but it's not. The company actually has a strong cash balance sheet.

So while you might look at all of Tahoe's problems and be put off-or you might not like what's going on in Guatemala, or all the expensive acquisitions, from a purely dividend perspective, this is our number one pick right now. At the end of the day, it's all about dividends after all.

#2 Osprey Gold (OS.V;OSSPF)

This small-cap company isn't likely on your radar-yet. But it should be. That's because not only is it a good time to start getting back into gold, but it's a good time to start looking at different ways to get back in, and it might be best to think out of the box. What stands out here is the cheap open-pit mining, new technology that is making it even cheaper, and a return to one of the most prolific gold rush venues in the world-Canada'sNova Scotia.

Nova Scotia has already supported three major gold rushes, and we're looking at a fourth in the making. Miners with new technology are rushing back here to scoop up the easy pickings, and Osprey is the only real entry point here.

Osprey has moved into Nova Scotia's Goldenville-and it's a gold miner's dream.

Here, the technology is the key because it's making expensive underground mining operations obsolete. Geologists have recently developed a technology that allows miners to assess mineralization of host rocks through which gold veins run-so in a historical first in Canada, they can mine gold in open pits. That means lower productions costs, reduced risks, and improved ability to scale.

And the Goldenville property is phenomenal from this respect. It's unlike any other place in the world because rocks from nearly every age are already exposed so Osprey's got the fast-track to gold here, and right across the street, another company has make a $250-million project doing the same.

At the end of the day, this is the key entry point because it's a small-cap company (only $7.5 million) sitting on what could be $560 million in gold.

#3Wheaton Precious Metals 

Wheaton is another good dividend play, paying out 20 percent of the cash it generates from operations racked up in the previous four quarters. The last quarterly dividend paid to shareholders was $0.07, but this one fluctuates, so we've seen it dip as low as $0.03 and soar as high as $0.14.

But beyond this, Wheaton is a great stock to own. Formerly Silver Wheaton, this company has seen shares rise more than 500 percent since 2005, and from most perspectives, it's going to continue on the upwards climb.

The reason for this is its unique business structure-and it's resulting high margins. Wheaton is unique because it doesn't just dive into mining. Instead, it looks for other major miners who need capital to expand existing projects. It seals its percentage of production at cut rates in this way, with long-term contracts that guarantee consistent cash flow. And it doesn't have to pay direct day-to-day mining costs. While at the same time it's incredibly savvy with its own overhead, it pays a minimum due to brilliant management.

With its multiple streams and diversity in combination with unique structure and stellar management, this stock is a smart choice on any given day.

#4 Newmont Mining  

This is the only gold mining stock listed on the S&P. Newmont is another favorite because of its strong balance sheet and asset value growth, but what you should be looking at here is how its restructured its portfolio to reduce risk and improve operational performance. With Newmont now you'll get exposure to stable gold and a nice, continuous cash flow. And it's expected to outperform.

Newmont's Q1 results impressed. Revenue soared 13 percent to $1.7 billion on higher pricing and volumes.

Attributable gold production jumped 9 percent to 1.23 million ounces for the three-month period as new production from Long Canyon and Merian nicely offset geotechnical concerns at Carlin. Exceptional weather affected operations in South America and Australia. GAAP net income from continuing operations came at $69 million while adjusted net income stood at $133 million.

#5 Franco-Nevada (NYSE:FNV)

FNV is also set to outperform this quarter, and this is a great play for the dividend-focused. This is the precious metals/royalty streaming business, so it's different than putting your money into direct mining. FNV provides cash up front to precious metals miners in return for the right to buy those metals at reduced rates in the future.

This is a high-margin business-over 70 percent. So, when gold prices have been weak, FNV is still increasing dividends. And we love the conservative operating strategy. You won't see yields as high as the direct miners, but you will see a very nice dividend consistency.

And while FNV has traditionally been all about gold and silver (or metals, in general), it's now moving quickly into oil and gas, which represented some 6 percent of its revenues in the first quarter of this year-and it's moving more in this direction.

Honorable Mentions in this space:  

Barrick Gold Corp. (NYSE:ABX) and Goldcorp Inc. (NYSE:GG): All eyes are on the billion-dollar partnership these two giants are forming in Chile's gold belt. Goldcorp is putting up $1 billion to get in on this deal as miners scramble for new sources of growth. This joint venture will see the two giant miners operate three properties in Chile's Maricunga region, and these will be major catalysts for both.

Agnico Eagle Mines (NYSE:AEM): Q1 was stellar for Agnico, especially for cash flow. Cash went onto this balance sheet despite all the spending on growth projects, and the rest of year looks set to be just as good. Follow the catalyst of construction at Meliadine, which has just launched and promises to be a massive project.

Alamos Gold: We might be in for an earnings surprise with this one, so this could be a good buy right now. A number of equities research analysts have raised their price objectives on this stock. With Desjardins estimating from C$13.25 to C$13.50.

By. Charles Kennedy

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