- Precious metal sits near all-time high around $3,000 an ounce
- Gold has massively outperformed the S&P 500 this century
- Gold mining stocks have lagged both the precious metal and wider equity indices, despite a number of takeover deals
- Three alternative ways to play the precious metal
“Gold is not everyone’s idea of a suitable portfolio investment – former prime minister and chancellor Gordon Brown once dismissed it as a ‘barbarous relic’ – but the precious metal’s rise to new all-time highs is eye-catching all the same,” says AJ Bell investment director Russ Mould.
“Central bank purchases of gold, plus substantial shipments into the US ahead of Donald Trump’s imposition of tariffs, are helping to drive the metal’s price higher, as are sticky inflation and ongoing concerns over lofty government debts on both sides of the Atlantic.
“Gold itself offers no yield, has limited industrial use and comes with a cost of ownership, in the form of storage and insurance, so many portfolio builders will still fight shy of embracing the metal, especially when they can get returns from cash in the bank that currently exceed inflation.
“But gold is durable, has a history of being money since time immemorial and is difficult and expensive to produce, so it can be seen as a store of value at a time when inflation is eroding the purchasing power of money in the West. Supply of gold grows much more slowly than that of ‘money’ and it is just possible that the inflation seen in 2021 to 2023 is part of the bill for the interest rate cuts and additional Quantitative Easing and money creation deployed by central banks to see the globe through the pandemic.
“Either way, the metal is doing well – but gold mining stocks are yet to shine, judging by how the New York Stock Exchange Arca Gold Bugs index continues to lag. It stands no higher now than it did in April 2006, when gold traded at barely $600 an ounce, not around $3,000.
Source: LSEG Refinitiv data
“As a result, the Gold Bugs index trades close to its all-time relative lows when compared to the price of gold.
Source: LSEG Refinitiv data
“This may persuade some investors to think about gold miners more, especially as the successful ones generate cash and pay a dividend, thus offering a yield. Their earnings and cash flow, and therefore potentially their dividends, are also highly geared to the gold price.
“However, a series of takeovers leaves London-listed options much thinner on the ground. Randgold Resources, Barrick Gold, Centamin, Hummingbird Resources and Shanta Gold have all fallen to predators. However, there is still one gold mining stock in the FTSE 100, Endeavour Mining, while Fresnillo produces gold even if silver is its main commodity. Resolute Mining has a London listing, to accompany the one it has in Australia, and AIM offers a selection of around 20 gold miners of varying degrees of maturity, from mining licence-holders to prospectors to established producers, where Pan African Resources may be the most established name.
“The world’s biggest gold miners by stock market valuation are however listed in the USA. Newmont is the biggest, with a $52 billion market capitalisation and it is a member of the S&P 500.
“Needless to say, not all gold miners are equal, and investors must patiently research them and apply six tests to see whether they may be suitable for portfolio inclusion or not.
- Whether a gold miner is already producing, in the exploration phase or is in the process of obtaining (and making the most of) a license.
- If it is in the production phase, the next task to is to assess the size of its resource and the production profile of existing mines. There is little or no point buying a gold miner if it is about to exhaust its reserves and deplete its mine.
Source: Company accounts
- Where the company operates, and the risk (or otherwise) of difficulties with local governments over mining rights and taxes, as well as the susceptibility of individual mines to problems posed by difficult conditions, such as extreme weather. Mali remains a particularly difficult place in which to operate at the moment, as Resolute Mining can attest following the detention of some of its executives ahead of the resolution of a tax dispute and the subsequent resignation of its CEO, who had been one of those held by the local authorities. Barrick Gold shuttered its mines in the same country after the government seized gold stockpiles and detained staff, as the company and the country argued over the implementation of the West African nation’s 2023 mining code. Barrick Gold eventually settled with a $438 million payment, and it remains committed to reopening its operations in the Loulo-Gounkoto region, pending approval from the ruling military junta.
- The company’s all-in sustaining cost (AISC) of producing an ounce of gold, as this will reveal how profitable (or otherwise) the firm will be relative to the prevailing metal price. Some miners publish a cash cost figure, but this may not include third-party smelting, refining, transport costs, local taxes and office running costs, so it might not give the full picture. Key cost variables include staff and diesel and fuel, and they can be affected in turn by local currency movements in the countries where their mines are situated.
Source: Company accounts
- The experience and skillset of the management team and executive board.
- The miner’s balance sheet and how much cash or debt it has. The more of the former and the less of the latter the better, especially if gold prices drop.
“Finally, having assessed the miner’s operations, investors must study the valuation currently attributed to its stock. This can be done using earnings or yield-based metrics, but both can be deceptive, especially if the gold price starts to swing around a lot. A further option is to look at net asset, or book, value (NAV). This will not move around so much, and should grow over time, at least if the gold price remains firm and profits start to pour out of the ground.
“Of the major gold mining takeovers, America’s Newmont Mining paid 1.7 times book value to acquire Australia’s Newcrest in 2023 and AngloGold Ashanti offered a similar multiple when it swooped for Centamin.
Source: Company accounts
“Gold Fields paid two times NAV for Osisko but Alamos Gold’s friendly bid for America’s Argonaut Gold valued its target at 0.33 times net asset value, perhaps as a reflection of its net debt position and relatively high AISC of $1,722 an ounce in 2023. Alamos kept the Canadian assets and then spun out Argonaut’s US and Mexican operations as a newly-created junior gold producer called Florida Canyon.”
Source: Company accounts, Marketscreener, consensus analysts’ forecasts
Source: Company accounts, Marketscreener, consensus analysts’ forecasts
Three other ways to invest in gold
Gold tracker
“The first option is to pick an exchange-traded commodity (ETC), or gold tracker fund, as investors may not wish to go to the trouble of storing and insuring their own gold bars or coins or risk taking physical delivery if they seek exposure via futures.
“It is possible to track the gold price in dollars or sterling and do so via the physical metal or futures prices, according to investors’ preference. Options to research include iShares Physical Gold. It seeks to track the day-to-day movement of the price of gold, less its fees, by holding gold bullion. This provides investors with the exposure they seek without the need to take physical delivery or trade commodity futures contracts.”
Passively run fund of gold miners
“For those who believe gold miners are cheap relative to gold – and who are prepared to take on the additional risk posed by miners’ operational gearing to the metal’s price – there is the option of a tracker fund which is designed to deliver the return generated by a basket of miners, minus the instrument’s own running costs.
“VanEck Gold Miners and VanEck Junior Gold Miners are both quoted on the London Stock Exchange and can be bought and sold in dollars or pounds. They come with annual total expense ratios of 0.53% and 0.55%, respectively.”
Actively run fund of gold miners
“There is a select number of active funds that will seek to pick out the best-performing gold mining stocks and avoid any duds, to maximise returns from the industry. Investors will pay a fee for accessing this expertise. BlackRock Gold and General may be the best-known fund in this field and it has around £1 billion in assets under management. Key holdings include Agnico Eagle Mines, Kinross Gold and Newmont Corp.
“There are also a number of London Stock Exchange-quoted investment trusts which dedicate themselves to gold (and also silver, platinum and palladium) miners, while Personal Assets Trust carried a double-digit percentage weighting toward gold bullion as part of its remit to protect and increase value per share for its investors over the long term.”
