When investors get nervous, they rediscover their lust for gold. It doesn’t matter that the precious metal has no practical uses, it’s been a store of value for more than 4,000 years. And when the economy looks likely to tank, the gold rush is on.
The gold price is now up 5% in the last month, 26% over one year, and a blistering 497% measured over 20 years. If that has you licking your lips, a word of warning. Gold is not a low-risk investment.
Its price can swing dramatically. It works best as a portfolio diversifier, as its price tends to rise when stock markets generally fall. However, this means it’s worth having some exposure, especially in today’s uncertain times.
One way to play the gold price metal is to invest in London-listed gold miners such as Centamin (LSE: CEY), whose share price is up a blistering 75% in the past three months. The rising gold price has certainly helped, but the Egypt-focused miner’s also delivered a positive recent update, with production up, costs down and the outlook promising.
Better still, the FTSE 250 miner boasts a “strong and flexible balance sheet with no debt, no hedging and cash and liquid assets of $326.6m.” It offers dividends as well as growth prospects, with the recent $46.2m interim bringing cumulative dividends to around $500m since 2014. The stock now offers a forecast yield of 3.8%.
Unsurprisingly, given recent share price growth, it looks a little pricey, trading at 21.2 times forward earnings. However, it may justify that with City analysts predicting 17% earnings per share growth in 2019 and another 18% in 2020.
Centamin looks well set, but growth also depends on factors beyond its control, primarily investor sentiment towards gold. The price has hit a six-year high, and it could struggle to press much higher from here. As ever, don’t go into this expecting another 75% growth in the next three months.
FTSE 100 miner Fresnillo (LSE: FRES) hasn’t done as well out of the rising gold price, although it’s starting to play catch up. The group, which is Mexico’s largest gold producer, lost its shine after repeatedly downgrading production guidance and delivering lower ore grades than expected, irritating investors who must feel it’s missing an open goal right now.
Its share price has more than halved over the last three years, but is now up 23% in the last month. It’s bounced back strongly from a disappointing trading update on 30 July, which showed core profits falling 45.7%.
Still, that could make it a tempting comeback play, and here’s something else. Fresnillo is also the world’s leading primary silver producer, and silver is currently rising faster than gold as investors fear the yellow metal is overpriced.
With earnings expected to fall 47% this year, the £5.5bn group’s P/E ratio has almost doubled, from 19 times forward earnings, to more than 37 times. The forecast yield is lower than Centamin at 1.7%.
Centamin looks the safer play at the moment, although Fresnillo may look like a tempting gamble to those happy to take on more risk.
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Harvey Jones has no position in any of the shares mentioned. The Motley Fool UK has recommended Fresnillo. 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.