I’ve always owned some physical gold, but I’m now also considering buying what I think are the best gold stocks on the London market. Here, I’ll discuss the risks and rewards of owning shares in gold-mining companies. I’ll also explain why I think now could be a good time for me to get into the miners.
Gold and gold miners
Gold has long been considered a good store of value. The price of the yellow metal sometimes deviates from the inflation rate due to short-run factors. But it’s been a reliable hedge against inflation over the long term. It can also provide some protection against sudden economic shocks or crises.
The best thing about gold stocks — in theory — is that they are a levered play on the price of gold. This is due to miners’ operational gearing. If I buy gold at $1,800 an ounce and it goes up to $2,000, I make a gain of 11%. If a gold miner has costs of $1,000 an ounce, it makes an $800 profit with gold at $1,800 but a $1,000 profit with gold at $2,000 — a 25% increase.
Of course, operational gearing works in reverse if the gold price falls rather than rises. However, given a long-term rising price, a profitable miner should be able to juice my returns, including via the distribution of surplus profits as dividends.
There’s been an extraordinary explosion of money-printing and debt, coordinated by central banks, in recent years. I reckon this debasement of paper currencies provides a strong base for gold for many years to come. Of course, there’s a risk I could be wrong. In which case, the outlook for miners may be less rosy than I envisage. There are other risks too.
Risk context for my best gold stocks
Some things are largely outside a mining company’s control. Most of the London-listed gold miners operate in countries with above-average political risk. There’s also currency risk. A miner’s costs are in the local currency, while the gold it sells is priced in dollars.
With this in mind, I think the best gold stocks should provide me with extensive geographical diversification. By owning a share of assets located across a range of countries, I can mitigate political and currency risk.
My best gold stocks to buy
I’ve cherry-picked five London-listed gold miners. In combination, I think these fit the bill well. In addition to providing me with geographical diversification, they’re all profitable and paying dividends. The table below summarises some of the key data that I think makes them my best gold stocks to buy.
|
| Producing assets | Share price (p) | Forward P/E | Forward yield (%) |
| Centamin | Egypt | 106.8 | 12.8 | 6.5 |
| Pan African Resources | South Africa | 17.62 | 10.0 | 5.0 |
| Polymetal International | Russia and Kazakhstan | 1,583.5 | 9.8 | 6.4 |
| Shanta Gold | Tanzania | 15.25 | 10.4 | 2.2 |
| Yamana Gold | Canada, Argentina, Brazil, and Chile | 342.5 | 12.1 | 2.7 |
In summary, while risk can never be eliminated, I think the combination of these five stocks offers me some protection against political and/or currency risk in any one country. The modest average price-to-earnings (P/E) ratio (11) and chunky average dividend yield (4.6%) add to my belief that these are probably the best London-listed gold stocks for me to own.
