A new day has brought another record high for the price of gold. Bullion values hit new peaks above $3,151 per ounce earlier on Tuesday (1 April), pulling a wave of gold stocks higher in the process.
Investors today have various ways to try and capitalise on the precious metals boom. They can go down the old route of buying physical gold like bars and coins. Individuals can also choose to buy an exchange-traded fund (ETF) that tracks movements in the yellow metal.
A better way to capitalise on the bull run, however, might be to buy gold mining stocks instead. A fresh report from Edison analysts explains why this could be the best path to consider.
Will gold miners shine?
According to executive director Neil Shah, “We believe gold mining equities are entering their most rewarding phase, with the foundation of strong gold prices now established“.
Looking at gold’s performance since 2019, Shah says that — following a rise in metal prices at the start of previous bull markets — the prices of large-cap miners tends to pick up around nine months later.
After this point, the performance of mid-tier producers accelerates “as major producer outperformance wanes“. This is followed by “the final and often most explosive phase of outperformance [from] from the juniors“, the analyst notes.
Beyond being in this ‘sweet spot,’ Shah suggests now may also be an ideal time to buy gold stocks as sector consolidation accelerates. He notes Gold Fields’ bid last month for Gold Road Resources, which was made at a 28% premium to the Australian company’s then-closing price.
Shah says that, “With major producers facing challenges in replacing reserves through exploration alone, acquisitions of advanced
developers and smaller producers become increasingly attractive at current gold prices“.
A top fund
It’s important to remember, however, that buying gold stocks rather than bullion itself adds an extra layer of risk for investors.
Operational problems are common across the mining industry and sometimes devastating for future earnings. Underwhelming exploration results can cause share prices to sink, and especially for junior miners. Production issues that drive up costs and hit revenues can be severe for even the largest of gold producers.
But investors can reduce (if not totally eliminate) such threats to overall returns by purchasing an ETF that tracks gold stocks. The iShares Gold Producers ETF (LSE:SPGP) is one I think merits serious consideration today.
It invests in 64 different mining companies, allowing it to absorb problems at one of two companies and still deliver a solid return. In the 12 months to February it delivered a decent return of 52.7%.
This ETF invests in some of the industry’s biggest players like Newmont, Agnico Eagle Mines, and Wheaton Precious Metals, providing it with extra robustness. But it also has holdings in dozens of mid-tier and junior miners, which in turn provides it with terrific growth potential.
Investors here pay an ongoing charge of 0.55%. But given its risk management qualities and the potential to provide stunning returns, I think it’s a great way for investors to consider investing in gold stocks.
