Gold Stocks, Bitcoin Crushed Despite Inflation Hedge Argument: Goldman Sachs Now Says Buy This Miner

Gold and Bitcoin BTC/USD have proven neither holds the title of being a hedge against inflation this year.

Gold equities, gold (the commodity) and Bitcoin have all suffered sharp declines over the past months. The VanEck Gold Miners ETF GDX has declined 37% off its April 18 52-week high of $41.61, spot gold is down 16% from its March 8 all-time high of $2,075.14 and Bitcoin has plunged about 67% since reaching an all-time high of $69,000 on Nov. 10. 2021.

Despite the steep drops and ahead of key inflation data expected to come out from the U.S. Labor Department on Tuesday morning, Goldman Sachs sees an upside for Agnico Eagle Mines Ltd AEM.

The company has “underappreciated exploration value” following its merger with Kirkland Lake Gold earlier this year, according to the analyst.

The Agnico Analyst: Emily Chieng initiated coverage of Agnico with a Buy rating and a price target of CA$72 ($55.45). The new price target suggests 24% upside for the stock.

The Agnico Thesis: The company added three mines to its portfolio through its recent merger: the Macassa, Detour Lake and Fosterville mines, which give Agnico “significant synergies,” Chieng said in the note. “The company has targeted $0.9 billion of synergies over the coming five years, and a total of $2 billion of synergies over the coming 10 years,” the analyst said.

“While corporate synergies are already approaching the top end of the company’s own expectations, we believe there exists upside to operational synergy (sharing of infrastructure, procurement and warehousing efficiencies, operational improvements) and strategic opportunities,” she added.

Chieng sees further upside based on Agnico’s potential for production growth from the company’s “largest ever exploration budget,” which it launched over the past two years.

In addition to Agnico’s exploration at properties formerly solely owned by Kirkland Lake, its deposits at the Odyssey Project, Hope Bay and Upper Beaver offer “significant exploration potential,” the analyst said.

The analyst also believes Agnico’s “multiple contraction is overdone” and that it “may have reflected uncertainty around the company’s production growth potential following the merger.”

Although Chieng expects Agnico’s annual growth rate to slow because of the merger, she sees “the company’s strong track record for exploration and development success as reflective of upside potential.”

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The Market Landscape: In late 2021, Federal Reserve Chairman Jerome Powell’s tone turned drastically more hawkish when it decided to double its taper of monthly bond purchases on Dec. 15. This year, in an attempt to fight soaring inflation, the Fed implemented a series of rate hikes, with a March raise of 0.5%. In June and July, the Fed doubled down on its policy and issued two 0.75% hikes back-to-back.  

Despite consumer price index (CPI) data for the month of July showing inflation may have peaked, Powell’s comments at the Jackson Hole Symposium last month indicated the Fed may not be ready to slow its policy, and that another 0.75% rate hike could be on the table when it meets on Sept. 15 and 16. 

The Fed, traders and investors will be watching for CPI data for the month of August to be released on Tuesday morning. When compared to the data for the month of July, it should become more apparent whether inflation has continued to decrease or whether July’s numbers were a blip.  

The information will guide the Fed’s policy decision later this week but the market will likely begin to price in the expectation of the percentage at which the Fed will raise its benchmark rate when the market opens Tuesday. 

The Gold Outlook: Spot gold has held up stronger than gold equities historically, but the last big bull run in gold and gold-related stocks, which took place during the first quarter, set the entire sector soaring with equities enjoying a slightly longer surge. 

Since then, spot gold and gold equities have been trading in fairly consistent downtrends on larger time frames (the weekly and monthly charts). On the daily chart, however, both spot gold and GDX began trading in uptrends on Sept. 1, which may indicate larger reversals to the upside are on the horizon. 

The Bitcoin Chart: Bitcoin negated its daily downtrend on Sept. 9 and on Monday the crypto regained the 50-day simple moving average as support, which may indicate longer-term sentiment is turning bullish.  

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Agnico Price Action: Shares of Agnico had risen by 1.59% to $44.81 at the time of publication Monday.