When to Sell vs Hold

Written by Karen Thomas, MSc, CFA at The Motley Fool Canada

Gold prices are currently trading at more than US$3,650 per ounce. This is 9% higher than one month ago, 21% higher than six months ago, 41% higher than one year ago, and 86% higher than five years ago. Clearly, gold is having a serious run. Accordingly, and as expected, this has meant that gold stocks have been soaring as well.

Let’s take a closer look in order to decide whether to sell into this strength or to hold.

There are a few factors that tend to move gold prices over time. The first is high inflation. Gold is considered a hedge against inflation. This is because the supply of gold is relatively constant, so its value is also relatively constant. Basically, it is a good preserver of value.

The second is a weakening of the U.S. dollar. As gold is priced in U.S. dollars, a weakening of the dollar makes gold less expensive to purchasers around the globe. Hence, demand for gold would theoretically rise, pushing up prices.

Finally, gold is viewed as a safe haven. Geopolitical problems and uncertainty, fears of recession, and general investor nervousness go a long way in boosting gold prices. This is exactly the type of environment that we have been experiencing for quite some time now. Investors have therefore been flocking to gold in order to address their skittishness and buy themselves some peace of mind.

I’ve made it no secret that my favourite gold stock is Agnico-Eagle Mines (TSX:AEM). The reason for this is the simple fact that Agnico has taken very deliberate steps to minimize its risk profile. This all starts with the company’s decision to focus its operations in politically safe, pro-mining jurisdictions. These jurisdictions include Canada, Europe, Latin America, and the United States.

This has set Agnico up as a company that is immune to the elevated country risk that many other gold companies face. In my view, there are enough risks out there, and I don’t want to add country instability to the list. So, I have been recommending Agnico-Eagle’s shares for quite some time now, and it has been a peaceful, stress-free ride to a more than 580% return over the last 10 years.

But Agnico-Eagle has not only benefited from this security and the soaring gold prices; the company has also benefited from its sound business practices. These sound and conservative business practices have resulted in strong cash flow and dividend growth over the long term.

Since 2020, Agnico’s cash flow from operations has increased more than 230% and its free cash flow has increased 390% to US$2.1 billion. Also, Agnico’s dividend has increased by approximately 190% to the current US$1.60 over the last 10 years.