The gold price has surged in recent months. Following this performance, some investors may have bought into the yellow metal ahead of further positive news.
However, there are other ways to invest in the gold price without buying gold directly. Owning mining stocks, such as the FTSE 100 and FTSE 250 companies listed below, may be the perfect alternative.
Gold price play
Owning mining stocks like FTSE 100 mining group Fresnillo (LSE: FRES) could be a better way to invest in gold without having to buy the yellow metal itself.
Thanks to the performance of precious metals this year, Fresnillo has earned itself a place in the ranks of the top-performing blue-chip stocks. It is up around 80% year-to-date. If the gold price continues to increase, this trend may continue.
According to its latest trading update, the company produced 26.8m ounces of silver in the first half of 2020 and 381,319 of gold. These figures were slightly below last year’s performance due to disruption caused by the coronavirus pandemic.
However, the higher gold price should more than compensate for the drop in production. Last year it cost the company around $850 to produce an ounce of gold and around $2 per ounce of silver. At the current gold and silver prices of $1,860 an ounce and $23 per ounce, respectively, it looks as if the business is making a healthy profit on its operations.
City analysts are forecasting an impressive 25% increase in the company’s earnings per share for 2020, followed by a rise of 57% for 2021. This implies the stock is trading at a forward PEG ratio of 0.7, suggesting the shares may offer a wide margin of safety at current levels.
What’s more, unlike gold, Fresnillo also offers a dividend. The stock currently supports a dividend yield of 1.1%, which could hit 1.6% next year, according to the City.
Petropavlovsk (LSE: POG) could be another way to invest in the gold price. Just like Fresnillo, the company has seen demand for its shares surging recently as investor sentiment towards gold mining companies has dramatically improved.
Its production has jumped this year. According to its latest trading update, gold production rose 42% in the first half of 2020. This timely increasing output will, according to analysts, translate into net income of $164m this year, up from $27m in 2019.
Based on these projections, the stock is currently dealing at a price-to-earnings ratio of just 7.8 and PEG ratio of 0.3. These numbers suggest the stock offers a wide margin of safety at current levels, which means it could produce high total returns for investors in the years ahead.
As such, it may be a good idea to buy a share of Petropavlovsk as the gold price continues to rise. It may produce higher returns over the next few years compared to the precious metal as company production continues to increase and costs fall.
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Rupert Hargreaves owns no share 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.