The three best

Due to the high fixed costs of mining, operational leverage means that small changes in revenue are magnified at the profit level. As such, movements in the price of gold also tend to be magnified in the movement of miners’ share prices. So we shouldn’t be surprised that as many as 24 of London’s gold miners have seen their share prices fall much further than the decline in the gold price. A 24% drop for FTSE 100 giant Randgold Resources and a 22% drop for mid-cap Centamin are fairly typical.

However, as well as operational leverage, other factors can influence performance, particularly among smaller companies. The five stocks that have risen so far this year all belong to London’s junior AIM market. Three of them have posted double-digit gains.

Cora Gold, an £8m microcap explorer, has released a string of positive updates on its drilling in Mali and Senegal. It’s shares are up 27%.

Shanta Gold, a £44bn explorer, developer and producer (its flagship mine is in Tanzania), has seen its shares rise 28%. The benefits of management changes last year, bringing a new focus on maximising shareholder returns through cost control and optimisation, have come through in spades this year.

Avesoro Resources, a £196m cap producer, has been the top riser, gaining 32%. This has come on the back of strong operational performance at its mines (one in Liberia and two in Burkina Faso) and good progress on converting mineral resources into reserves and extending mine life.

Clearly, all three companies are doing well, but are their shares worth buying today? Microcap explorers like Cora are too speculative for me but Shanta and Avesoro, while still high-risk, are stocks in which I’d consider a small position at their current valuations. Shanta is forecast to post revenue of £82m this year and earnings per share (EPS) of 1.5p, putting it on a price-to-earnings (P/E) ratio of just 3.7. Avesoro is expected to generate revenue of £240m and with forecast EPS of 47p, is on a P/E of 5.1.

Lower-risk option

Finally, if I were looking for lower-risk exposure to gold, a stock I’d be happy to buy today is ETFS Physical Gold (LSE: PHGP). This provides a simple and cost-efficient way to gain exposure to the gold market by providing a return that mirrors the gold price (less the management fee). The ongoing charge is a reasonable 0.39%.

There are a number of similar vehicles on the market but there are a couple of things about ETFS Physical Gold that appeal to me. It’s the UK’s largest, with a market value of close to $6bn. And unlike some of the alternatives, which mirror the movement of the gold price synthetically with derivatives, ETFS Physical Gold, as its name suggests, is backed by physical gold. This is held by HSBC Bank as custodian. Each physical bar is segregated, individually identified and allocated.

Whether you prefer your gold safely locked up in a vault or the excitement of exploration, the London market caters for it.

The post The 3 best gold stocks of 2018 (so far) appeared first on The Twelfth Magpie.

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G A Chester has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Why invest in gold?

As a safe haven asset, gold is negatively correlated to price movements in the stock markets. This means investing in gold can help you diversify your investment portfolio so that you’re better protected when there’s a market crash. There’s a lot of uncertainty around, and gold can be a useful way to preserve capital during periods of market volatility.

What’s more, as with most commodities, gold is a good hedge against inflation. In the UK this has so far only ticked up slightly in July, but as inflation expectations have surged since the country voted to leave the EU, many analysts expect inflation to have a lot further to climb in the coming year.

Physical gold vs gold mining stocks

There are many ways in which investors can get exposure to gold prices. Buying physical gold bullion coins and bars is the most direct method of investing in gold, but it can be very expensive for small investors. Instead, investors should consider buying physical gold funds and gold mining stocks, which are already popular with retail investors.

Physical gold ETFs, like ETFS Physical Gold (LSE: PHGP), offer investors a cheap way to track gold prices. These ETFs are useful for investors looking for a safe haven in times of economic uncertainty, especially in the short term. And since price fluctuations for gold are generally less volatile than stocks, owning physical gold is usually lower risk than investing in gold miners.

Investing in gold mining companies is generally considered to be a leveraged play on gold prices. That’s because, small changes in the gold price can have a huge impact on the profits of gold miners. 

Also when it comes to gold miners, you’ll find that not all stocks are created equal. The differences in valuations, reserves and production costs are hugely significant in determining the intrinsic value of each miner, and you’ll have to keep an eye on all of these factors to help you pick the right stock.

Randgold Resources (LSE: RRS) is one of the priciest miners, with a forward P/E of 34. But given that it has the best track record for project delivery and increasing production volumes, it’s probably the safest and most reliable pick too.

Smaller rivals such as Centamin (LSE: CEY) and Hochschild Mining (LSE: HOC) may be more risky, but they could offer investors potentially greater returns because they appear to be doing more to ramp up production and cut costs. Recently, Hochschild has been doing particularly well, with the company reporting a major exploration discovery and a big surge in gold and silver output for the first half of 2016.

The post Should you buy gold or gold miners? appeared first on The Twelfth Magpie.

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Jack Tang has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

The Oracle of Omaha

Legendary US investor Warren Buffett — in a 2011 letter to shareholders of his Berkshire Hathaway investment group — famously compared the entire world’s gold stock of 170,000 metric tons, valued at $9.6 trillion (pile A) with another set of assets costing an equal amount (pile B). Pile B consisted of “all US cropland (400 million acres with output of about $200 billion annually), plus 16 Exxon Mobils (the world’s most profitable company, one earning more than $40 billion annually)”, and about £1 trillion spare cash left over.

He continued:

“A century from now the 400 million acres of farmland will have produced staggering amounts of corn, wheat, cotton, and other crops – and will continue to produce that valuable bounty … Exxon Mobil will probably have delivered trillions of dollars in dividends to its owners and will also hold assets worth many more trillions (and, remember, you get 16 Exxons). The 170,000 tons of gold will be unchanged in size and still incapable of producing anything. You can fondle the cube, but it will not respond”.

Owners of gold, Buffett said, “are not inspired by what the asset itself can produce — it will remain lifeless forever — but rather by the belief that others will desire it even more avidly in the future”.

If you didn’t already know, you’ve probably guessed by now that the world’s greatest investor doesn’t bother with gold!

Insurance policy

The argument for having some exposure to gold, put forward by many financial advisors — 5%-15% of your assets seems to be a common recommendation — is as a kind of “insurance policy”. Gold often does well during times of fear — when shares are typically falling — and, thus, can mitigate the decline in value your portfolio would otherwise be showing.

Buffett is not concerned about periods of volatility in equities, but if you are, you could consider adding some exposure to gold. Right now, there’s a good deal of uncertainty around. Will there be a “Grexit” or will the can be kicked further down the road in a “Fudge-it”? Why has the Chinese stock market gone haywire? These are just some of the questions on the minds of nervous equity investors.

Of course, you don’t really want to be buying a gold “insurance policy” when everyone else is avidly buying and the “premium” (price) is high. Perhaps surprisingly, though, demand for gold is muted right now. Apparently, the strong dollar is making the US currency the flight-to-safety asset of choice for the time being.

Gold is currently some 40% below its September 2011 all-time high of $1,921 an ounce. Over the last three years the price is down 27%, and over the last year by 12%. As such, now might be a reasonable time to buy your gold insurance policy, if you’re so inclined.

Choice

Many equity investors looking for exposure to gold will naturally think of gold mining companies. FTSE 100 giant Randgold Resources (LSE: RRS) (NASDAQ: GOLD.US) will be familiar to most. Rangold’s shares are down 28% over three years and down 17% over one year. That’s in line-ish with the price of gold, but the company’s earnings have declined more markedly than the share price. The miner could actually be an attractive buy, based on a forward price-to-earnings growth ratio of 0.9 for 2016.

However, investing in a gold miner — even a blue chip, such as Randgold — wraps up equity risk with exposure to the yellow metal, which isn’t really what’s wanted from an insurance policy. The point is only emphasised by looking at a fund, such as unit trust BlackRock Gold & General, which has 60 holdings, including Randgold at 10% of the portfolio. This fund is down 52% over three years and 22% over one year.

No, for an insurance policy — aside from literally buying lumps of gold — an exchange traded fund (ETF), which can be bought like any other share on the stock market, is probably the best option. ETF Securities Physical Gold (LSE: PHAU) simply tracks the movements of the price of gold (less the management fee), reflected in three-year and one-year performance figures of -28% and -13%. Unlike some ETFs that achieve the purpose “synthetically”, this one is backed by physical gold held by HSBC, each bar being segregated, individually identified and allocated.

The post Is It Time To Buy Gold As Grexit Looms? appeared first on The Twelfth Magpie.

More reading

• With a yield of 6.8% and a P/E ratio of 12.1, is this a dirt cheap FTSE 250 stock to consider?
• Will SpaceX, Nvidia, or Alphabet be the first $10trn stock?
• Up 95%! This FTSE 100 stock’s outperformed Nvidia over the past year
• With a 9.3% yield, is this an amazing opportunity to consider buying dirt-cheap Taylor Wimpey shares?
• How much do you need in a Stocks and Shares ISA to aim for £375 a week in retirement?

G A Chester has no position in any shares mentioned. The Motley Fool UK has recommended shares in HSBC. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.