When it comes to gold and the best gold stocks, investors don’t often consider the impact that national defense spending can have on inflation, which in turn can impact gold prices.
While a growing number of economists are talking about “peak inflation” and predicting a lower domestic inflation rate in the coming year, few have considered the potential inflationary impact of higher military spending as the conflict in Eastern Europe continues and the U.S. contributes vast sums to supporting Ukraine.
The U.S. Senate Armed Services Committee recently approved a record $858 billion in military spending for fiscal year 2023, an increase of $45 billion over the White House’s budget request, and nearly $80 billion over the amount earmarked by Congress for 2022. It was also a record peacetime level, with defense spending trending higher in the face of increased geopolitical threats around the world.
U.S. contributions to supporting Ukraine’s military have been steadily rising throughout the past year, with the White House approving a $3 billion military aid package just last week—Washington’s largest aid package since the Russia/Ukraine war began six months ago. The U.S. has also committed an estimated $60 billion in security assistance to Ukraine since January 2021—a spending trend many economists expect to persist in the foreseeable future.
Historically, there has been a positive correlation between accelerating rates of U.S. defense spending and higher gold as priced in U.S. dollars. When national defense consumption expenditures increase at least 5% or more year-over-year, gold tends to strengthen (as it did the last time this happened in the period between 2017 and 2020, and before then during the Iraq/Afghanistan war years in the early 2000s). Currently, defense consumption expenditures are increasing around 3% but are pushing closer toward the 5% range which, if reached again, could trigger another boom in gold prices.
That the market is likely anticipating another round of inflation can be seen in the 6% jump in gold prices between late July and mid-August. This occurred during the same time when Internet search results for the term “peak inflation” were spiking, according to Google Trends data. It would appear, then, that informed participants are still worried about the possibility of inflation accelerating in the coming months and are taking precautions by accumulating gold, even as the crowd is looking in the opposite direction.
With this in mind, let’s take a look at three gold mining stocks that should benefit from an inflation-related resurgence in gold prices. These are the top blue-chip mining firms that produce the precious metal that is in strong demand whenever investors seek protection from the ravages of inflation.
The 3 Best Gold Stocks for Q4
Best Gold Stock #1: Freeport-McMoRan Inc. (FCX)
Freeport is actually a multi-metal play: aside from operating the world’s largest gold deposit (in Indonesia), it’s also the world’s largest molybdenum producer and the second-largest copper producer. After delivering a 19% increase in copper sales in 2021, Freeport is projecting growth in volumes for both copper and gold in 2022, along with further growth in 2023. Earlier this year, the company unveiled a performance-based shareholder return plan for 2022 that provides for up to 50% of Freeport’s free cash flow to be used for buybacks and variable dividends, with the balance used for growth and further balance sheet improvements. The main attraction with Freeport is the dual exposure to gold and copper, with the latter metal expected to experience a demand resurgence (particularly in China) in the coming months as industry- and military-related use increases, along with low inventories and expected production cuts due to soaring energy costs—all of which should give a boost to prices.
Best Gold Stock #2: Newmont Mining (NEM)
Newmont is the world’s largest gold miner by production, with operations in North and South America, Australia and Africa. The company boasts the industry’s largest gold reserves, also producing copper, silver, zinc and lead. Newmont expects to produce 6.2 million gold ounces in 2022 (a 3% improvement from last year) at an all-in sustaining cost of $1,200 per ounce—higher than last year’s but still comfortably under the current gold price of around $1,700 and allowing for plenty of profits. The company is also targeting gold production growth of as much as 6.8 million ounces annually over the next five years, with costs projected to decline starting in 2023 (thanks partly to investments in profitable projects). The attractions here are a strong balance sheet, industry-leading management and a 5% dividend, which Wall Street believes to be sustainable provided gold prices remain above $1,600 an ounce.
Best Gold Stock #3: Barrick Gold (GOLD)
Barrick is one of the world’s lowest-cost gold miners and the second largest by production. In the second quarter, Barrick produced around one million ounces of gold and 120 million pounds of copper. While gold production was unchanged from a year ago, copper production had a noteworthy 25% increase. The mostly favorable results were led by a solid quarter from Barrick’s Carlin Complex in Nevada, which reported 28% growth in production, in turn helping to fuel a big increase in free cash flow of $169 million (compared to a cash outflow of $19 million a year ago). Barrick consequently ended the quarter with nearly $630 million in cash to finance its bustling project pipeline. Aside from its balance sheet strength, a big part of the attraction here is Barrick’s management, which is second-to-none. CEO Mark Bristow is a geologist with an excellent long-term track record of bringing value to major gold mining companies. He was formerly the founder and CEO at Randgold Resources before Barrick bought it. He now presides over what one industry observer has called “an impressive portfolio of mines.” Additionally, shareholder returns are a big part of Barrick’s allure; it repurchased $182 million in shares in Q2 as part of a huge $1 billion share buyback program and pays a steady dividend. All told, it’s a solid value play.
These three companies are some of the best gold stocks to hold for the remainder of the year; to learn what other metals and mining companies I’m bullish on, consider a subscription to Cabot SX Gold & Metals Advisor today.