The benchmark 10-year Treasury note was yielding 1.53% as of early trading on Sept. 28, the highest level since June. According to market participants, it signals the risk of higher inflation in the months ahead, leading investors to raise their expectations of a hike in the Federal Reserve's interest rates.
During the prepared remarks for his testimony on the "Coronavirus and Cares Act" on Tuesday, Fed Chairman Jerome Powell said that although inflation pressures could last longer than expected, the central bank will continue to support the economic recovery as long as necessary. So, the period of near-zero interest rates could last longer than what traders think.
Elevated inflation causes investors to flock to asset classes where value tends to follow the increase in the price of goods and services, such as precious metals, real estate assets and cash. In contrast, low rates favor investments in assets that are not bonds or other fixed-income securities.
To safeguard the value of a portfolio, investors can rely on the properties of gold-backed assets since they offer ideal protection against not only a low-yielding environment, but also the headwinds caused by elevated inflation.
Furthermore, the resurgence of Covid-19 infections in the United States increases uncertainty in the financial markets, with the possible occurrence of periods of high volatility. In this scenario, gold also works efficiently.
Therefore, under the tailwinds of aforementioned factors, the precious metal, at $1,734 per troy ounce as of the time of writing, is expected to rise in the coming months.
If these prospects are attractive enough to warrant seeking opportunities among publicly traded gold operators, then investors should consider Royal Gold Inc. (RGLD, Financial) as the Denver-based gold streaming and royalty company shines so bright that it leaves most competitors in the dark.
The company holds rights to nearly 190 mineral properties worldwide. In addition to mineral interests on more than 40 producing mines, the portfolio includes 17 development-stage metallic projects.
The company enjoyed strong execution of its stream and royalty activities in fiscal 2021, resulting in the adjusted Ebitda margin increaseing by 220 basis points year over year to 80% of total revenue of almost $616 million. In fiscal 2020, total revenue came in at approximately $500 million.
Operating costs also increased on the back of higher metals prices and sales, while general and administrative costs, as well as exploration expenses, declined.
Thus, the company could squeeze a robust cash flow of $407.2 million from annual operations, a 19.5% increase from $341 million recorded the year before. Part of the cash flow was used to reinforce the balance sheet through a substantial reduction in the amount of the total debt outstanding. The immediate benefit was lower spending for interest expenses.
Including undrawn credit facilities, the total liquidity position of the company accounts for $1 billion, far exceeding $8.15 million in total debt. The company has more than enough financial resources to continue the business, fund exploration activities in Botswana and Brazil and pay the quarterly dividend of 30 cents per share.
For the first half of fiscal 2022, which will end on Dec. 31, 2021, Royal Gold expects to gain rights for the sale of 175,000 to 185,000 ounces of gold equivalent from streaming agreements and royalties, which will be an 8% increase from the same period in fiscal 2021.
This, coupled with the expected rise in the gold price, should produce a strong tailwind for the share price. As a result, the stock has a high likelihood of rebounding significantly after losing 10% so far this year. It was at $99.04 as of early trading on Tuesday.
With a market cap of $6.51 billion, Royal Gold doesn’t seem expensive as its shares trade below the 50-day moving average value of $109.46 and below the 200-day moving average value of $114.49.
Wall Street issued a median recommendation rating of overweight with an average target price of $141.10 per share.
