This Is the Worst Start to a New Year for the Dollar Since 1987, and This Industry Is Loving It

By Sean Williams Markets Fool.com

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Big changes are afoot in Washington. It was widely expected with the transition from the Obama administration to the Trump administration that we'd see a considerable number of changes implemented once Donald Trump took office and that's certainly been the case. In his first 10 1/2 days in office, Trump wound up signing 20 executive orders and proclamations, edging now-former President Barack Obama (18 executive orders and proclamations) as the most active ever within the first 10 1/2 days of entering office.

The dollar just had a miserable month

However, taking into account the vastness and swiftness of Trump's orders, as well as his political and military inexperience, these changes aren't sitting well with some Americans, analysts, or investors. During January, the U.S. dollar index fell by more than 2% against a basket of six major global currencies, marking its worst month since March 2016, and the worst start to a new year for the greenback since 1987.

The ironic part about weakness in the U.S. dollar last month is that it plays right into the hands of what Donald Trump would prefer to see. Trump, a lifelong businessman, has previously opined that the U.S. dollar is too strong, and that he'd prefer to see it weaken against global currencies. He appears to be getting his wish.

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The reason Trump prefers weakness in the greenback relates to his desire to see the U.S. trade deficit wane, if not be turned on its head and made into a trade surplus. A strong dollar does help American consumers by allowing their dollar to stretch further when buying overseas goods, but it makes American goods more expensive in foreign markets. Conversely, a weaker dollar makes U.S. exports seem more attractive to foreign buyers. Trump's hope is that dollar weakness will boost the demand for exported U.S. goods.

Some U.S. multinationals that rely heavily on exports clearly welcome dollar weakness. An industrial giant like Boeing (NYSE: BA), which has contracts to build planes for airlines all over the world, is a great example. Boeing could see a notable surge in orders if the dollar weakens considerably, and over a long period of time. Albeit, Boeing is also suffering a bit of a knee-jerk reaction at the moment over concerns that President Trump's America-first policies might hurt orders from select Middle East countries.

This industry has been cheering the dollar's demise

However, one industry has been absolutely licking its chops at the dollar's miserable start to the new year: precious-metal mining companies. During January, the price for physical gold rose by more than $59 an ounce, or 5.2%, while silver practically doubled up gold's gain with a 10.1% move higher for the month.

This move really shouldn't come as much of a shock since precious metals and gold tend to have an inverse relationship with one another. The dollar typically rises when the U.S. economy is operating on all cylinders; and when that's happening gold, which is often viewed as a safe-haven investment during times of uncertainty, loses its popularity. The uncertainty created by Trump's numerous executive orders, as well as his political inexperience, appears to have created a rush back into precious metals during January.

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But, fear isn't the only reason gold and silver have been looking more lustrous as of late. The supply and demand outlook for both metals has been favorable. Gold and silver mining companies drastically cut back on their capital expenditures once gold entered into a multi-year downtrend, which had the effect of capping supply growth. On the flipside, investment demand for gold was substantially higher in 2016 than in previous years. Typically, growing demand and constrained supply is a good recipe for rising prices.

Lastly, and to build off the prior point, we've witnessed a big improvement in the underlying fundamentals of the mining companies themselves. Quite a few have jettisoned non-core assets, reduced debt, lowered capital spending, and focused their projects on higher-yielding mines. In some cases, we've even seen mining companies push their operations entirely underground to gain access to higher ore yields and lower long-term costs. The entire industry is looking better from a fundamental perspective than it has in arguably a decade.

Mining names you should know

While it's great for mining-stock investors that gold and silver prices are going up, there's certainly a line that can be drawn to separate out the good companies from those that are great. Here are a few of the top-tier precious-metal miners you may want to have on your radar, or in your portfolio.

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To start, it's pretty hard to pass up the gold-mining behemoth with the lowest all-in sustaining costs (AISC) in the entire industry: Barrick Gold (NYSE: ABX). Barrick has an impressive streak of having lowered its AISC in three consecutive quarters, with the midpoint of its current fiscal 2016 forecast at $757.50. This would provide about $450 an ounce worth of margin based on the current price of gold.

What's more, Barrick has reduced its debt from $13.1 billion at the end of 2014 to what should be about $8 billion by the end of 2016. Less debt means more financial flexibility and lower interest expenses to service its debt. With a number of non-core assets gone and the company focused on its top-tier projects (Goldrush and Turquoise Ridge), Barrick has a real shot at a sub-$700 AISC by 2019.

Another strong contender is Silver Wheaton (NYSE: SLW), which isn't a traditional mining company. Silver Wheaton is actually a royalty and streaming company that provides large sums of cash to mining companies so they can develop or expand a mine. In return for this upfront capital, Silver Wheaton gets a long-term or life-of-mine contract guaranteeing it a percentage of gold, silver, or by-product production at a substantially below market rate. During the third quarter, Silver Wheaton's average cash costs were just $4.51 per silver ounce and $390 per gold ounce, providing a healthy buffer between current spot prices. Investors in Silver Wheaton are also privy to a dividend that's somewhat dependent on its gold and silver margin.

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For those of you looking for something with a bit more risk and reward, Yamana Gold (NYSE: AUY) may be the answer. Whereas many of its peers have been cutting capital expenditures, Yamana Gold has been moving forward with a handful of exciting projects.

Both its C1 Santa Luz and Cerro Moro projects should begin commercial production in 2018, with Santa Luz capable of producing 130,000 ounces of gold during its first year. After that, the Suruca development in the Chapada mine should be good for 45,000 to 60,000 ounces of added gold production between 2019 and perhaps 2023. Even the recently acquired Riacho dos Machados mine has a lot to offer, with annual production expected to hit 100,000 ounces, up from the 55,000 ounces a year it was producing when acquired. Yamana's EPS could triple or quadruple by the end of the decade compared with its expectations for 2016, which should put this miner squarely on the radars of growth-seeking investors.

As long as dollar weakness persists, gold and silver stocks should benefit.

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Sean Williams owns shares of Silver Wheaton. The Motley Fool owns shares of Silver Wheaton. The Motley Fool has a disclosure policy.