That was the headline CPI print this week that sent the Nasdaq soaring over 7% in a single day!
Granted, there were still some big numbers in the BLS’ report: Groceries were up 12.4%, energy commodities rose 19.3% while energy services popped 15.6%. Transportation services likewise were up 15.2% (almost certainly as a result of the still surging energy prices). Core inflation cooled to 6.3%, just off its all time high last month
But on the whole, the number posted its fourth monthly decline from the June high of 9.1%. So one could be forgiven for interpreting a nearly 8% year-over-year price increase as good news.
Of course with the drop in CPI came the inevitable rehash about what’s next for the Fed.
These days the Fed is still looking to appear hawkish (if not actually be hawkish). At the same time, a lot of Fed governors have been talking up the possibility of tapping the brakes on the recent rate hikes. Of course, they don’t want any slow down in increases to make them appear dovish… so when they go 50 bps December, people will still think of it as aggressive. (Fed psychology is complicated…)
This is all a conversation we can carry on at another time.
Today, while inflation is taking what might be called a break, I want to take a look at a market that’s been relatively under the radar for the last year and a half.
Gold: The Great Inflation Hedge (Not)
First off let me say I’m not a fan of the shiny metal like some investors. I don’t think it’s a great hedge for inflation. In theory, at best, the long term real rate of return of owning gold is ZERO. I believe there are better ways to protect your capital against the drain of inflation, and I’m going to share a specific one today.
I’m talking about miners…
In my consulting business I’ve been working with some micro-cap mining companies that I believe are on the cusp of making some significant mineral discoveries giving them a lot of upside potential. Of course they also come with their share of risk.
But when you move into the realm of the mining world’s bigger players, you’re talking about a very different game.
While I’m not necessarily a believer in gold as an asset, I do believe in a company’s ability to mine and sell it. And I’m willing to own the companies that do that the best — and pay a dividend on top of it.
Effectively, in my opinion, mining companies are an even better proxy for gold.
So let’s talk about one that I believe is fairly priced… Newmont Mining (NEM).
Newmont Mining Corp. (NEM)
Swing and a Miss
Newmont Mining just reported its Q3 earnings at the beginning of this month. And they weren’t what you’d call spectacular…
Newmont Corp. posted adjusted net earnings of $212 million, or 27 cents per share, in the third quarter, down from $483 million, or 60 cents per share, in the 2021 quarter…
Their reported earnings also missed analysts estimates of $0.29 per share. They did report they were on track to make their full year guidance of 6 million ounces of gold.
The weaker than expected numbers, however, were largely attributable to general weakness in the gold market itself:
The average realized gold price was $1,691 per ounce in the third quarter, compared with $1,778 per ounce in the 2021 quarter and $1,836 per ounce in the second quarter of this year.
It’s been a challenging 18 months or so for Newmont, but now I think their fortunes are about to start changing.
Here are three reasons I believe Newmont is worth a look today.
Reason No. 1…
First and foremost, their dividend is really solid.
In June 2020, Newmont began raising their annual dividend from $0.56 to a very respectable $2.20 by March of 2021. The obvious intention is to attract new investors.
The now-competitive yield of 4.7% is certainly very attractive. Naturally they’ll need to maintain and, ideally, keep increasing it from here.
But they’ve maintained this payment for two years (again, through some challenging times) and I think that qualifies them for some consideration.
Gold Could be Ready to Rebound
One of the biggest conundrums for a lot of investors over the past year is the overall weakness in the price of gold given that inflation has been pretty much rampaging around the world.
But its price action isn’t so surprising if you consider the surrounding factors…
For nearly the last two years, the US dollar has been in the midst of a substantial bull run gaining nearly 27%.
US Dollar Index ($DXY)
One of the driving forces behind this explosive strength in the dollar has been the Fed’s aggressive action to tighten interest rates. (Higher rates typically make a country’s currency more attractive.) Since way back when inflation was still “transitory,” the smart money knew that the Fed would eventually have to take action where their zero interest rate policy went and got on board.
If you want to see the impact this dollar strength had on the price of gold, just take a look at a gold chart priced in Euros…
Or British Pounds…
You can see the declines from the 2022 highs are much less severe — almost sideways. US Dollar priced gold, on the other hand, actually took out its 2021 low!
Now that it’s possible the Fed may be backing off its aggressive hikes (I’d expect another 50 basis points in December and then a slowdown into 2023 when they can continue to adjust in more reasonable 25 basis point increments) it’s also very possible we could be seeing a bottom in the price of gold.
I think a move back above US$ 1,800 would bode well for miners like Newmont
The Other Metal They Mine…
Another thing to remember is that Newmont isn’t solely in the business of mining gold. In addition, they also mine silver and a very important industrial metal that I believe is about to see an explosion in demand…
If you look at the report by Statista, you can see Newmont’s annual production has been on the decline for the past few years from 125 million pounds (56,818 metric tons) to just 56 million pounds in 2020. Then in 2021 production started to uptick…
Newmont Corp. Annual Copper Production
I think that trend is going to continue. Here’s why…
In a recent study released by S&P Global, copper shortages are going to create unprecedented demand:
Global copper supply is set to fall well short of demand by 2035, with an unprecedented deficit in the market looming as the rapid expansion of energy transition-related applications worldwide doubles copper demand to about 50 million mt/year…
According to the study… there could be a staggering supply-demand deficit of up to 9.90 million mt in 2035, far surpassing the highest deficit recorded so far of just under 1 million mt in 2014. Even under the study’s most optimistic scenario, the deficit would be up to 1.5 million mt in 2035.
A coming surge in copper demand would likely push the price back to $5 per pound — the all time highs we saw earlier this year — and possibly higher. Prices at those levels will put a lot of attention back on the copper market.
The reality is, the fortunes of any mining company will rise and fall with the fate of the minerals they mine. Newmont has weathered some tough times this past year and a half and they’ve not only come through in solid shape, they even raised their dividend!
I think their valuations have become more reasonable, and the economics surrounding their business will start picking up as well. In six or 12 months, these prices may look downright cheap.
Newmont Corp. (NEM) is definitely worth a look…
Make the trend your friend,
Editor, Streetlight Confidential