In recent months, focus on gold stocks has rapidly increased. Part of this has coincided with the appreciation in the price of the precious metal. It also has something to do with testing all-time high’s and a potential move into unchartered territory, above $2,075 per oz.
Yet investors need to be careful when picking the right mining and commodity stocks to purchase.
All that glisters is gold
Before getting onto stock specifics, let’s run through some reasons why gold could do well going forward.
Gold is seen as a safe haven which performs well during periods of uncertainty. Particularly in the US, chances of a recession are rising. Given the size of the economy, investors across the pond are likely going to continue to increase gold holdings to protect themselves.
As interest rates have been rising, the opportunity cost of buying gold over the past year has been high. Why own gold that pays nothing when you could make 4% on a Cash ISA?
However, it appears that the Bank of England and the US Fed are now reaching the peak interest rates. Therefore, if rates stay flat (or even get cut to help boost growth) over the next year, gold should stand to benefit.
As a risk, if central banks are forced to raise interest rates higher still in the next year, gold could fall.
Finally, from a technical perspective, gold could surge higher if it breaks above the all-time highs. At $2,039, it’s very close to the record price. If it goes past this, a lot of investors are likely going to jump on the bandwagon. This could act to further inflate the price as people rush to buy.
The best ways to express this view
For investors that agree with me that the price of gold could go higher, buying stocks related to the metal makes sense.
However, it doesn’t make sense to simply buy any mining or commodity stock. For example, take Anglo American, one of the largest FTSE 100 mining stocks. In the latest production report, it focused on copper, nickel, platinum and many other elements. But not gold! So the impact on the share price of a move higher in the gold price isn’t going to impact this stock.
Rather, I need to selectively pick stocks. For investors wanting to stick to the FTSE 100, my favourite pick would be Fresnillo. It focuses on silver and gold, with seven mines in operation for gold.
Small-caps can offer more exciting opportunities, but also carry a higher level of risk. For example, Greatland Gold. The business is a mining development and exploration company, with the main site in Western Australia. The returns of striking gold in new projects could help to boost the share price, alongside any moves in the gold price.
I’m considering buying both shortly, given my positive outlook for the precious metal.