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Why 2017 may be a good year for gold stocks

Photo: Andrzej Barabasz (Chepry). Cropped. Licence: https://creativecommons.org/licenses/by-sa/3.0/

Gold prices might be set for a rebound this year, thanks to expectations of rising inflation and continuing US and European political uncertainty. Although the price of gold has come under pressure in recent months, amid the rally in global stock markets and a strengthening US dollar, I don’t think this trend is set to continue for long.

Uncertainty

The price of gold has already strengthened somewhat in recent weeks, after plummeting to a 12-month low in December, following growing concerns over President Trump’s foreign trade and immigration policies.

There remains a lot of uncertainty at the global macro level, and the US is not the only source of risk to the global economy. In Europe, major elections in France, Germany and the Netherlands are looming. And following the big election surprises in 2016, further political surprises seem highly plausible and this could drive up safe-haven demand for gold.

Inflation

Then there is the outlook for rising global inflation. Fortunately for many investors, some assets offer better capital protection against inflation than others. And like most commodities, gold tends to hold its value, which explains why it is generally seen as a good hedge against inflation.

On the downside, however, rising inflation in the US could lead the Fed to raise interest rates more quickly than previously anticipated, and this could put pressure on the price of gold. As the price of gold is denominated in dollars, an increase in US rates would raise the cost of buying gold from a foreign investor’s standpoint. What’s more, other safe-haven assets, such as US Treasuries, would become relatively more attractive as yields rise, and this could conceivably curtail investor appetite for the precious metal.

Upward momentum

There are many ways in which investors can get exposure to gold prices, but I think buying gold mining stocks is best. That’s because mining profits are leveraged to the price of gold, which means a small change in the price of gold could have a huge impact on profits. What’s more, gold miners are increasingly looking to return more cash to shareholders, which could prompt renewed interest in the sector.

My preferred gold miners are Randgold Resources (LSE: RRS) and Acacia Mining (LSE: ACA). They both have strong balance sheets and proven track records in developing big gold mining projects, which make them well placed to benefit from further upward momentum in gold prices.

Randgold has an attractive near-term production outlook and has recently reported an upbeat trading update – yesterday, the company said it was on track to beat its 2016 production guidance of 670,000 ounces. The stock currently trades at a forward P/E of 24.8, and earnings are set to rise 21% this year.

Meanwhile, Acacia is delivering even faster production growth. Full year production rose to 829,705 ounces in 2016, 13% higher than in 2015, with city analysts expecting the company to deliver pre-tax profits of around £200m in 2016. This implies Acacia is reasonably priced at 15.3 times expected 2016 earnings, which compares favourably against the sector average of 22.3 times.

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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.