Gold stocks have bombed in 2021. Time to buy?

As investors scramble for shares in companies set to benefit from an economic recovery, could now be a great time to buy unloved blue-chip gold stocks?

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Looking at the FTSE 350, I’m struck by the poor performance of gold stocks so far in 2021. And extending that to a 12-month view, I can see share price falls of as much as 50%.

Should I steer well clear? Or is this a brilliant opportunity for me to buy discount shares in the top gold producers on the London market?

Gold stocks have bombed

The table below shows just how badly the FTSE 350 gold stocks have performed:

 

Performance year to date (%)

Performance one year (%)

Centamin

-17.8

-50.1

Endeavour Mining*

Fresnillo

-23.0

-29.2

Hochschild Mining

-25.8

-32.5

Petropavlovsk

-36.3

-38.3

Polymetal International

-8.7

-19.2

FTSE 350

+10.2

+22.5

* Canada’s Endeavour Mining (a major producer in West Africa) had its shares admitted to trading on London’s main market in June. It’s expected to be given FTSE 250 status when the index announces its latest review (tomorrow).

As you can see, the dire performance of these stocks contrast with the strong gains made by the wider FTSE 350. With gold being the ultimate safe-haven asset, investors snapped up sector miners’ shares as the pandemic unfolded last year. But rising optimism later in the year and in 2021 has seen investors flock to businesses that will benefit from an economic recovery.

Gold and gold-mining stocks have become unloved. The price is down 4.2% in the year to date and down 7.5% over the last 12 months. Gold stocks tend to exaggerate up-and-down movements. This is due to miners’ operational gearing. Further, Centamin’s particularly poor one-year performance was compounded by an operational setback last October.

Risks

Movements in the gold price, the high volatility of gold-mining stocks due to operational gearing, and the potential for operational setbacks are all risks I need to accept, if I want to invest in the sector. And in the event of further weakness in the price, the value of my investment could fall — and by a larger magnitude than gold itself.

That said, I’m far more comfortable buying at the kind of discounts I’m looking at today than when investors are clambering over each other to get their hands on gold and gold miners’ shares. And there’s another reason for my current bullishness.

Continuing case for gold stocks

Gold has been considered a store of value since the year dot. As a result of the pandemic, global debt has reached eye-watering record high levels and governments are still printing ‘magic money’. I think this should support a gold price at which miners can make very nice profits (and pay very nice dividends) for potentially years to come.

Why I’d buy today

All six companies have recently reiterated their production guidance for 2021. Five of the six are forecast to pay interest-rate-busting dividends for the year (yields of up to 6.5%), with the other (Petropavlovsk) forecast to resume dividends next year.

To be sure, the price of gold will always be a significant influence on investment returns — for better or for worse. But bearing in mind my belief in a supportive macro-environment for the gold price and the current discount share prices — also that between them the companies own a good number of mines (mitigating operational risk) and that their assets are spread across a good number of countries (mitigating geopolitical risk) — the six stocks look very buyable for me today.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

G A Chester has no position in any of the shares 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.

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