Until a few weeks ago, it was just transitory. Now the Federal Reserve is finally acknowledging that inflation is lasting longer than initially anticipated. Inflation will likely continue higher and longer than originally expected unless the Fed begins winding down its easy money policies.
There is a risk that growth might stop if rates are raised, so rates are being kept low for the time being, which is good for gold. But if kept low for too long, these interest rates cannot be healthy because they favor the inflationary process, and at some point soon, inflation could begin to outpace growth.
Furthermore, many industrial and supply chains are still broken across various sectors, employers are struggling to find workers due to tight labor conditions and the minimum wages needed in order to make a job worthwhile are increasing due to inflation.
In essence, the situation remains very uncertain. Higher uncertainty may lead to increased volatility, causing investors to flock towards gold, as the metal is used as a safe-haven asset. Historically, it is known to provide a strong shield to the value of portfolios when volatility is high. Thus, the demand for the precious metal is expected to increase. Gold futures with expirations in December are currently $1,804 per troy ounce, down 3.5% over the past year, but they are expected to surpass $1,880 in the next 12 months.
Investors could benefit from the expected gold price tailwinds by investing in shares of Gold Resource Corp (GORO, Financial). Based in Denver, Colorado, Gold Resource is producing the precious metal from its mining activities located in Mexico.
Following a year-to-date total reinvestment of nearly $20 million in exploration and development activities in Mexico, the company has significantly upgraded operations in terms of more years of future production and higher efficiency. This is expected to produce positive effects as the miner should be able to achieve better margins on gold prices because costs will be spread on a larger throughput.
Combined, these two tailwinds could result in a strong increase in the cash flow (eventually leading to a dividend hike) as well as appreciation in the share price.
Shareholders can purchase the company's attractive future growth prospects at a discount. After a 30% drop in the past year, the share price is $1.79 as of Oct. 27, which is standing significantly below the 200-day moving average value of $2.22.
Also, the price-book ratio is 1.43 versus the industry median of 2.33 and the enterprise-value-to-Ebitda ratio is 2.83 versus the industry median of 8.9.
In the third quarter of 2021, Gold Resource posted net income of $1.5 million, or $0.02 per share. Revenue increased by over 30% year over year to $29 million and yielded an operating cash flow of $5.7 million. This was possible thanks to the sale of 9,170 ounces of gold equivalent, which implied the payment of an all-in sustaining cost of $1,031 per ounce and an average sale price of $1,762 per ounce.
As of Sept. 30, 2021, the balance sheet had $30.54 million in cash available on hand. The company will use part of it to acquire 100% of Aquila Resources Inc. (AQARF), a Canadian explorer and developer of a high-grade gold deposit in Michigan. Aquila Resources Inc. is accounting for 1.1 million ounces of gold, which can be exploited further both at depth and along strike. The transaction is expected to close sometime next month, which could lead to a significant jump in the share price.
Additionally, the stock grants a forward dividend yield of 2.23% (versus the S&P 500’s 1.3%), as of Oct. 27.
The 14-day relative strength index is 62, which means that the stock is neither overbought nor oversold.
