Editor’s note: This column is part of InvestorPlace.com’s Best Stocks for 2021 contest. Eric Fry’s pick for the contest is Osisko Gold Royalties (NYSE:OR).
When the gold price is falling, one of the worst kinds of stocks to own is a gold stock. That’s why Osisko Gold Royalties Ltd. (NYSE:OR) stock has performed poorly so far this year. It is a gold stock.
Since the start of 2021, the price of gold has slipped about 9%, which has caused most gold-focused stocks to slump as well. Osisko is no exception. The stock has dropped around 10% year-to-date.
Although it is impossible to cite a specific reason why the gold price has been drifting lower, the dollar’s recent uptrend is certainly part of the reason. After bottoming out at 89.20 on Jan. 6, the Dollar Index has advanced nearly 5%.
That’s a big move in the world of currencies. And since gold tends to move inversely with the dollar, the greenback’s recent winning ways have produced losing ways for the gold market.
But all is not doom and gloom for precious metals. In fact, one major developing trend could light a fire under the gold price once again.
The Link Between Fiscal Deficits and Gold Prices
That all-important trend is the U.S. federal deficit.
Typically, when the federal deficit is soaring, one of the best kinds of stocks to own is a gold stock. And at the moment, the deficit is not merely soaring — it is skyrocketing to multi-decade highs.
The annual federal deficit recently topped $3 trillion — a titanic sum equal to more than 16% of our annual gross domestic product. That 16% number is the largest federal deficit since the 1940s deficits that financed World War II!
In times past, runaway government spending of this magnitude would trigger the gold-buying influence. But as you can see from the right side of the chart above, the gold price has not yet responded in any major way to our major deficit spending.
Maybe this time is different. Maybe bitcoin is “the new gold,” as many crypto fans assert. Time will tell. But even if the gold price merely muddles along, Osisko Gold Royalty remains on a solid growth trajectory.
As I pointed out previously, the company is a midsized royalty and streaming company that holds a portfolio of 138 royalties, streams, and precious metal offtake agreements.
Of these 138 assets, 16 are currently in production, including the world-class Canadian Malartic gold mine that Yamana Gold Inc. (NYSE:AUY) and Agnico Eagle Mines Ltd. (NYSE:AEM) operate in Quebec, Canada.
Importantly, Malartic isn’t simply Canada’s largest gold mine. It is also a mine that is growing even larger.
A new underground discovery has added nearly 15 million ounces to the project’s total resources. This discovery is so large — and so likely to grow in size as exploration continues — that Yamana and Agnico announced in February that they would spend $1.3 billion to develop this deposit.
Osisko bears none of this expense but stands to reap significant cash flow from its royalty on this project once the new underground mine moves into production.
Last year, Osisko produced approximately 64,000 gold-equivalent ounces (GEOs). But the company expects that number to jump to at least 78,000 GEOs this year.
But a new growth phase is underway.
A Doubling of Production in Three Years
The Montreal-based company expects its annual gold equivalent production to double over the next three years to more than 140,000 ounces, based on prospective output that is already in the pipeline.
A doubling of production in three years could be enough of a catalyst to boost the stock price significantly.
The consensus of analysts on Wall Street and Bay Street expects Osisko to double earnings per share to about $0.55 over the next two years.
At that level of profitability, the stock would be trading for 25 times earnings. But these estimates do not include any prospective boost from rising gold or silver prices.
Nor do these estimates anticipate any upside surprises from the ongoing exploration at Canadian Malartic. But upside surprises would be no surprise at all.
If the gold price continues to muddle along throughout 2021, Osisko will likely do the same. But a less-bad gold price could work wonders for the stock.
And even if the yellow metal fails to dazzle investors this year, Osisko’s impressive growth profile could lift the stock to market-beating gains over the next couple of years.
On the date of publication, Eric Fry did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Eric Fry is an award-winning stock picker with numerous “10-bagger” calls — in good markets AND bad. How? By finding potent global megatrends … before they take off. And when it comes to bear markets, you’ll want to have his “blueprint” in hand before stocks go south.