Despite falling by around 8% since the US election, gold is still up by over 10% since the start of the year. It’s been a positive year for the precious metal, with 2017 all set to be an even better year.
Gold appeal
The main reason for this is gold’s appeal as a defensive asset. The global economy faces unprecedented risks in all three of its major financial regions. For example, in the US a new president will be in control from next month and his policies are likely to create uncertainty. That’s not necessarily because they’re guaranteed to fail, but rather because they represent a major change from the status quo.
Similarly, Brexit and a decline in the outlook for the eurozone are likely to affect the EU. A French election could also create additional problems for the single currency zone. And with China still slowing down in terms of its pace of growth, it would be unsurprising for investors to turn to gold due to its historical status as a store of wealth.
Gold mining shares
While buying gold directly or via an ETF may be a good idea for some investors, buying gold mining shares may be an even better one. That’s at least partly because companies such as Polymetal (LSE: POLY), Fresnillo (LSE: FRES) and Centamin (LSE: CEY) offer excellent value for money. As such, investors in those stocks could benefit from a rising price of gold in 2017, as well as an increase in the ratings of the three companies in question.
Value for money
In Fresnillo’s case, it’s moving more heavily towards gold production, although it remains the world’s largest silver miner. It’s forecast to record a rise in earnings of almost 10 times in the next two years, which has the potential to positively catalyse investor sentiment. This puts it on a price-to-earnings growth (PEG) ratio of less than 1, which indicates that it offers excellent value for money as well as a wide margin of safety.
Similarly, Centamin is ramping up its gold production and has been able to do so ahead of plan. It’s expected to record a rise in its bottom line of 2.5 times in the current year. Alongside a price-to-earnings (P/E) ratio of 20.9, this puts the company on a PEG ratio of only 0.1, which shows that its shares could move higher even if the gold price fails to make new highs in 2017.
In addition, Polymetal is due to record a rise in its earnings of over 90% during the next two years. Its P/E ratio of around 19 indicates that its shares are trading below their intrinsic value. The company’s strategy continues to progress relatively well, while its financial standing is likely to be boosted by improved cash flow over the medium term.
Outlook
Clearly, there’s no guarantee that gold will perform well in 2017. However, the appeal of gold miners is that they’re cheap at the present time and so aren’t reliant on a rising gold price in order to record sizeable capital gains. Certainly, a higher gold price would help and on this front there are a number of reasons to be optimistic, including a slowing China, Brexit and a new US leader. As such, now seems to be the right time to buy the three gold miners for the long term.
