Many investors use gold as a hedge against inflation. Because of that, it has become a hot commodity in recent years as fears of inflation have increased due to all the economic stimulus pumped into the global economy to keep it running during the pandemic.
With inflation running at its hottest level in nearly 40 years last year, we asked three Fool contributors for their favorite ways to invest in gold. Here’s why they think Franco-Nevada (NYSE:FNV), Wheaton Precious Metals (NYSE:WPM), and Agnico Eagle Mines (NYSE:AEM) are the best gold stocks.
Gold and a little bit more
Reuben Gregg Brewer (Franco-Nevada): I’m not a huge fan of precious metals miners because the basic business model tends to be fairly volatile, driven largely by commodity price swings. However, streaming and royalty companies like Franco-Nevada take a different approach to the space that helps to smooth out the ride while still providing exposure to gold and silver. Streamers pay miners up front for the right to buy precious metals at reduced rates in the future. Miners use the cash to build new mines, expand existing ones, make acquisitions, or simply to spruce up their balance sheets. Franco-Nevada gets to lock in low prices and, thus, tends to have generous margins in both up markets and down ones.
Royal Gold and Wheaton Precious Metals basically do the same thing, so Franco-Nevada is not unique on this front. What sets it apart is that Franco-Nevada also has a bit of exposure to energy markets (15% of revenue) via deals similar to those it inks for metals. While that means it isn’t a pure-play precious metals stock, I think the diversification adds a material benefit given the commodity nature of the business. The proof of the success here is in the company’s dividend, which has been increased annually for 14 consecutive years despite the inherent volatility of the precious metals sector.
Franco-Nevada isn’t exactly cheap today, with a historically low dividend yield of 0.9%. However, if you are conservative like me and still looking for a gold stock, this diversified play on the space is one you should strongly consider.
A high-margin gold stock
Matt DiLallo (Wheaton Precious Metals): Wheaton is a precious metal streaming company. It pays mining companies an up-front fee to help them finance development and expansion projects. It receives the right to purchase a portion of that mine’s production at a fixed price in exchange.
The company’s various streaming contracts enable it to purchase gold at an average price of $451 an ounce through 2025. With gold recently trading at more than $1,840 an ounce, Wheaton Precious Metals is making a lot of money.
For example, in the third quarter, the company had an average cash cost of $410 per gold equivalent ounce. Given where precious metals prices were in the quarter, its cash operating margin was $1,354 per…