Gold stocks have been slipping this week. But analysts at UBS reported on Wednesday (22 October) that this doesn’t seem to be driven by anything fundamental.
Given this, investors might see a chance to participate in what has been an unusually strong growth story over the last 18 months. And there are lots of potential ways to do so.
Gold ETFs
One strategy is buying shares in an asset that aims to track the price of gold, such as the iShares Physical Gold ETC. And I think there’s actually a lot to like about this approach.
Warren Buffett points out that gold is an unproductive asset. Someone who buys a kilo of gold today will have a kilo of gold in 2055 and it won’t have generated any cash along the way.
That’s true – a block of gold isn’t going to start making products or providing services. But the chances of it going away are close to zero and that’s not true of a number of companies.
With that in mind, I think gold ETFs are worth considering. For investors just wanting to speculate on the price of gold, they’re a pretty straightforward option.
Mining companies
For investors looking for a bit more action, shares in gold mining companies could be worth considering. One that’s listed in the UK is Endeavour Mining (LSE:EDV).
Gold miners can be riskier than ETFs and Endeavour is an extreme example. Its operations across Africa can create difficulties as governments want to control assets on their lands.
The big advantage, though, is that they’re a lot cheaper to run. That allows it to extract gold at a lower cost than other producers, meaning it stands to benefit more from rising prices.
Given this, investors with a bullish view on gold prices might considering buying Endeavour shares. The stock is down 10% this week, but its cost advantage hasn’t gone anywhere.
Exploration
A third strategy is to look at stocks like Franco-Nevada (NYSE:FNV). The company doesn’t operate mines, but it provides financing in exchange for a share of what the mine produces.
There’s a lot to like about this model. Most obviously, it avoids the high capital requirements associated with mining and generates a revenue stream without the associated costs.
It doesn’t entirely eliminate the risk of operational issues. If a mine Franco-Nevada has a stake in has to pause production for whatever reason, the firm makes nothing until it resumes.
Franco-Nevada, however, owns interests in hundreds of mines around the world. So while the threat of an operational problem isn’t zero, a diversified portfolio of assets helps limit the overall risk.
Gold prices
The main force driving gold prices recently has been the threat of US dollar debasement. And that’s also one of the biggest risks to the stock market as a whole at the moment.
Investors who expect the rally to continue have a number of choices. An asset tracking the price of gold is relatively simple, whereas miners offer more risk for more potential reward.
It’s easy to overlook royalty companies like Franco-Nevada in favour of producers. But I think its low capital requirements can make the stock a very attractive option to consider.
