Inflation hits 9.1%! Should I seek safety in gold stocks?

Gold is viewed by many investors as a hedge against inflation. Our writer considers whether gold stocks have a place in his portfolio in 2022.

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According to the ONS, inflation soared to 9.1% in May. The Bank of England anticipates double-digit inflation by the autumn. Broadly speaking, rapidly rising prices are a headwind for stock market gains. But gold stocks could be an exception if investors flock to gain exposure to the precious metal in an attempt to preserve their wealth.

Let’s take a closer look at two gold miners I’m considering for my portfolio, namely FTSE 100 company Fresnillo (LSE: FRES) and FTSE 250 constituent Centamin (LSE: CEY).

Fresnillo shares

Fresnillo is a mining company with operations throughout Mexico. It’s the world’s largest producer of silver and Mexico’s second-largest gold miner. It also produces lead and zinc.

Over the past 52 weeks, the Fresnillo share price has trailed the FTSE 100 index slightly — it’s down 2%. The stock offers a 3.25% dividend yield.

In its latest quarterly results the company declared a 5.1% increase year-on-year in silver production. However, there was a 34.4% decrease in gold production primarily due to a lower volume of ore processed at its mine in Herradura.

Fresnillo has faced difficulties resulting from recent labour reforms in Mexico to restrict the subcontracting of labour. This has forced the miner to internalise a high proportion of its contractor workforce.

Furthermore, the business is also experiencing delays to new equipment deliveries caused by global supply bottlenecks.

Analysts are divided on the outlook for this gold stock, with 12-month share price targets ranging from 745p to 1217p. Currently, Fresnillo shares trade for 811p.

Centamin shares

Centamin is the largest gold producer in Egypt. The company also has exploration projects in Côte d’Ivoire and Burkina Faso.

The Centamin share price has faced some difficulties recently — it’s down 23% over the past year. The stock offers an 8.8% dividend yield.

In its latest quarterly results the company revealed an 11% year-on-year decrease in gold production at its Sukari mine due to a scheduled reduction during a transition to expand its underground operations.

This transition is now complete, which means Centamin should be able to unlock the full potential of the mine’s orebody going forwards.

The miner forecasts 6.3% inflationary pressures in Egypt, which is a headwind. It has also been hit by an 85% increase in local transport costs.

Nonetheless, Centamin’s balance sheet position looks promising to me. Net cash and liquid assets total $217.3m and the company is debt-free. What’s more, the company maintains a target to approve an annual dividend of at least 30% of its net cash flow.

Should I buy gold stocks today?

The current spot price of gold is $1,829 per ounce. Prices could climb higher in the months ahead as global inflation rates continue to spiral. This should provide support for these gold mining shares.

There’s vigorous debate about how effective exposure to gold is as an inflation hedge, but gold stocks often behave differently to the broader stock market. Accordingly, I think opening a small position in a gold miner could help diversify my portfolio.

Of the two, I’d prefer to buy Centamin shares. The FTSE 250 stock has a singular focus on the yellow metal, offers bigger dividends, and has a lower price-to-earnings ratio of 11.53 compared to Fresnillo’s 17.38.

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.

Charlie Carman 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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