Investment Thesis: Inflation continues to run hot despite central banks continuing to raise rates. Meanwhile, gold has been out of favor for a while and is not looking once again to be heading to new highs. Barrick Gold (NYSE:GOLD), which has a strong portfolio of gold reserves, is increasingly looking like it will be taking advantage, of the tailwinds, including increasing gold prices, and improving production levels.
Where is the Price of Gold Headed?
M2 has been contracting in North America, something which has not happened in almost a century. Although the money supply continues to increase globally, the higher rates, leading to economic uncertainty. As a result, a number of central banks, and individual investors continue to pile into the precious metal, as a flight to safety. Central banks have been buying gold at record rates in recent times, including a number of major central banks.
In terms of specific central banks buying gold China has been the biggest buyer of gold, and in 2022, gold demand jumped to historical highs with total demand coming in at 4718 tonnes. Although, China has not officially declared its total gold, but estimates the official declaration stands at around 2000 tonnes. But, on the other hand, could be much higher anywhere around 4000 tonnes, and likely headed higher, as the country tries to turn the Yuan into a reserve currency.
Multiple central banks continue to invest in gold, as a backstop to their currency during times of monetary turmoil. China clearly has ambitions to make the Yuan into a global central bank currency. Meanwhile, the Federal Reserve has been buying gold also as the monetary uncertainty, and economic uncertainty after inflation push the interest rate above 5%. The increasing interest rates have seen a fallout, leading to failures for the likes of Silicon Valley Bank fail, as deposits quickly left the bank, resulting in a bank run. It’s clear that central banks are going back to their original book, which is buying gold, as inflation continues to be a threat to the global monetary regime, and debt default risks continue to spike.
Due to a large amount of money pushed into the system, inflation continues to run above 6%, and this means that not only central banks, but individual investors also continue to see gold as a place to invest their savings. Total demand for gold may rise by another 10% in 2023, above the 4700 tonnes already in 2022; this means that unless gold production heads up significantly it is likely that gold prices will likely be headed into the $2000s in 2023.
There is already a short supply of gold, and adding to individual gold demand are also ETFs that have seen outflows in recent times, but remain a key piece in the total demand for gold. I expect all these themes, i.e. central bank buying gold and retail demand for gold, to continue heading higher. China and India both have seen demand wane in December, as consumer sentiment softened. This has been the general theme globally as inflation worries and reducing purchasing power have affected consumers.
Barrick Gold to Benefit From Increased Production
This puts Barrick Gold in a position, where their own record levels of production, combined with their resource, could lead to a record level of cash for the coming year. Investors will mainly look to how much cash Barrick Gold returns, and after returning $1.6 billion in 2022, and taking into account considering that management has projected that production will rise to around 4.5 million ounces, up from 4.1 million ounces, in 2023, combined with what I expect the average price of gold in 2023 to be around $2100-2300, per ounce, could mean that cash flow that the company returns to shareholders could be around $1.9-$2 billion. Barrick Gold has indicated that it will continue to increase production out of key facilities, including the Cortez and Pueblo mines, which should help it reach its target. If the price of gold keeps rising, production levels could be pushed further, to 4.6 million ounces, and that would only increase how much cash flow comes through.
Financial Continues to Improve
Furthermore, Barrick Gold continues to post a relatively reasonable dividend of 3.5%, and that could increase to 4%, in 2023, especially if the price of gold increases. In addition, the company’s forward P/E currently stands at around 22x, considering that gold prices and production are both headed up I expected that the next quarter will see around $3 billion in revenue, and end-of-year revenue will be around $12.5 billion, which would mean Barrick Gold goes back to the levels of revenue we saw a couple of years ago, thereby, the 22x forward P/E would be quite cheap. Assuming that net profit margins currently stand at around 4%, will likely head back to around 17-18%, which would mean around $2.1 billion in net income. Therefore, my own estimate the forward P/E would be closer to around 14-15x, which makes GOLD stock relatively cheap.
But, risks remain to the price of gold and production, as declines in global M2, could lead to commodity prices falling. The key to gold prices remaining elevated is the difference between supply and demand, which currently is clearly tilted towards demand. But if interest rates continue to affect and push up unemployment, retail demand could wane.
Should trends continue as they are Barrick Gold remains a strong mid-longer term prospect. Issues remain to the downside should demand falter, but the momentum remains on gold’s side, with analysts currently bullish on the stock.