Do Bank Failures Mean It's Time To Invest In Precious Metals?

Key Points

• Gold and silver ETFs were gapping up the week of March 13 following bank failures.
• The performance of precious metals is generally tied to the U.S. dollar more than the broader stock market.
• Analysts expect large caps Wheaton and Barrick to grow earnings at double-digit rates in 2024.
• Precious metals should be part of a broadly allocated portfolio. 

As markets reacted to news about bank failures, as well as problems at financial institutions such as First Republic Bank NYSE: FRC, precious metals jumped into rally mode. The week of March 13, penny stock Hycroft Mining Holding Corp. NASDAQ: HYMC has led the charge, with a gain of 15.94%, but even higher-quality precious metal stocks are participating in the rally. 

It’s not surprising that investors are flocking to precious metals as a perceived haven amid a possible stock-market downturn. Although equities were turning higher on March 14 as it became clear that the failure of Silicon Valley Bank and others wasn’t likely to be the harbinger of a 2008-style financial crisis, precious metals were still on the rise. The prospect of a slower pace of Federal Reserve rate hikes also factored into the equity market uptick. 

Gold And Silver ETFs

The iShares Gold Trust ETF NYSEARCA: IAU was up 1.93% for the week as of March 14, although it opened lower Tuesday as equity markets gapped up. Meanwhile, the iShares Silver Trust ETF NYSEARCA: SLV advanced 6.63% for the week. 

The price leader on March 14 was Houston-based Contango Ore Inc. NYSEAMERICAN: CTGO, a small company that explores for gold ore and other minerals in Alaska. The thinly traded stock popped 7% in the session. A look at its chart, using a bar or candlestick view, shows you the wide price gaps that you’ll often find with small, thin stocks. This indicates a lack of liquidity, meaning traders may not get the price they want when buying or selling. 

Barrick Gold 

When it comes to institutional quality stocks, Canadian gold and copper miner Barrick Gold Corp. NYSE: GOLD was up 6.44% for the week, after jumping 6.98% on March 13 in double average turnover. 

Although Barrick’s rise was due to fear about the equity market, the company actually has some solid future potential, with Wall Street eyeing earnings increases of 4% this year and 24% next year. MarketBeat data show a rating of “moderate buy” with a price target of $21.88, an upside of 29.15%. 

The stock has essentially been correlated with the S&P 500 since early February, which may not be what you’d expect to see. However, precious metals don’t always show a low correlation or no correlation with broad equity markets. In fact, they often show an inverse correlation with the U.S. dollar, which has been declining since March 6.

Gold prices, which are pegged to the greenback, tend to show an inverse correlation to the dollar. In general, a weaker dollar sends gold prices higher, for the simple and intuitive reason that more of the precious metal can be purchased when the dollar is down. 

Wheaton Precious Metals

The institutional-quality miner with the best recent price performance is Wheaton Precious Metals Corp. NYSE: WPM, which coincidentally reported fourth-quarter earnings on March 9, just as the Silicon Valley Bank saga began to unfold.

Wheaton missed analysts’ views, as you can see using MarketBeat earnings data. 

Nonetheless, shares soared 3.61% on March 10, and were up 6.92% on Monday, March 13. The stock was posting further gains on March 14. All those gains came in heavier-than-average trading volume. 

While analysts believe the move is tied to the recent weakness in the dollar, there’s valid reason for some bullishness about the company itself. Wheaton is in the business of streaming, which means it buys purchase agreements from metals producers to provide capital. 

Wall Street expects Wheaton to grow earnings 4% this year and 16% next year. MarketBeat analyst data show a “moderate buy” rating on the stock, with a price target of $45.80, representing an upside of 4.59%. 

Metals As A Hedge

It’s wise to look at precious metals as a hedge against inflation, the broad equity markets, or the dollar. However, that’s more of an investment philosophy than a short-term trade. It’s certainly possible to make money on shorter-term trades, but precious metals deserve a place in a well-diversified portfolio exactly because they can hedge against certain market developments. 

When allocating precious metals, it’s generally a good idea to focus on institutional-quality large caps with solid fundamentals or invest in an ETF.