Over the last month the price of gold has increased 13% over uncertainty about the struggling economy around the world and the volatile financial markets. Higher precious metal prices pushed up the stocks of many gold mining companies such as Goldcorp (GG.) Investors of gold stocks feel more optimistic about the sector as Goldcorp’s share price climbed about 27% over the last month on slightly higher than average volume to sit at roughly $15/share today. On February 1st, the company declared its second monthly dividend payment for 2016 of $0.02 per share. Shareholders of record at the close of business on Thursday, February 11, 2016 will be entitled to receive payment of this dividend on Friday, February 19, 2016. Goldcorp has paid a monthly dividend to its shareholders since 2003. As one of the leading producers of precious metals Goldcorp claims it’s focus is on responsible mining practices with safe, low-cost production throughout the Americas. It plans to deliver long term value to shareholders with its portfolio of high quality assets.
Although Goldcorp has been hurt by a weakening gold price over the last few years the company is still one of the lowest cost producers in the world with an all-in sustaining cost of US$846 per ounce. Meanwhile the comparable costs for the industry in general fall between US$1,100 and US$1,200 an ounce. Margins in the precious metals industry right now are incredibly tight for all but the most efficient miners. Goldcorp, like many other gold companies, has seen declining top line revenue for the past four years, and has even lost money for the last two years due to the declining price of gold. But while the stock market is at a 52 week low and is down by more than 10% over the past year, gold is currently at a 52 week high. This could be the beginning of a gold rally. Due to some recent worse than expected economic data and the faltering stock market, many investors are becoming doubtful that the Federal Reserve will follow through on its original plan to tighten monetary policy further this year after a 0.25% interest rate increase in December 2015. So if the Fed decides to adopt a more dovish tone or even cuts the interest rate back down in an attempt to stimulate domestic growth and add liquidity to the financial markets, then the U.S. dollar will probably become weaker. And a weaker dollar equates to a higher price of commodities, including precious metals such as gold and silver, which would be a benefit for Goldcorp and other gold mining companies.
While the financial markets in the U.S. have been declining for the most part there have been two noticeable exceptions so far this year. Both U.S. treasuries and gold have outperformed year to date. As the yield of 10 year government bonds falls from 2.2% to 1.7% the value of current outstanding treasuries is increased. Meanwhile gold has climbed from $1061 in the beginning of the year to roughly $1235 today, representing a 16% gain year to date. This is an interesting combination of events because treasuries have traditionally been a defensive tool to fight against deflation and economic contraction, while gold is usually seen as a tool to hedge against the effects of inflation and higher interest rates. So it is rare to see both asset classes perform so well at the same time. To be fair we are only approaching the middle of the first quarter of the year so short term movements may just become insignificant blips in the long term trajectory. We’ll have to wait and see how things play out through the rest of the year.
Disclosure: This author is long 100 shares of GG at the time of writing this article.