Investing In Gold Stocks In The UK

Gold has been a beloved asset for centuries and remains as popular as ever today. Here, I’ll talk you through what gold stocks are and reveal some of the UK’s gold-mining shares.

What are gold stocks?

Gold stocks are simply publicly traded investments that focus on gold. They provide an indirect way for investors to benefit from rising precious metal prices. When the commodity increases in value, so can profits at the companies that pull the shiny substance out of the ground.

Shareholders in gold-mining shares can enjoy a share of the earnings by way of dividends. They can also watch the share prices of their gold stocks rise along with values of the physical metal.

Gold is used widely in the manufacture of jewellery as well as in a number of industrial applications. However, the metal’s chief role as an investment commodity is what makes it — and by extension, gold-mining shares — such a divisive asset class.

Non-fans argue that gold has no real purpose in a world where trade is dominated by the use of paper currencies. Some argue, too, that the growing popularity of cryptocurrencies lessens the usefulness of precious metals still further.

Others, however, believe that gold’s eternal sentimental appeal, along with its status as a ‘currency of last resort,’ mean that the yellow metal remains a critical investment asset.

Top gold mining stocks in the UK

There are many UK mining companies that are involved in the production of gold. This gives share investors a broad range to select from:

Gold stockMarket capDescription
Fresnillo (LSE: FRES)£5.43bnA Mexico-focused gold and silver miner listed on the FTSE 100
Centamin (LSE: CEY)£1.04bnA FTSE 250 gold-mining stock with a focus on Africa
Caledonia Mining Corporation (LSE: CMCL)£136mAn AIM-quoted gold stock that operates in Zimbabwe

Fresnillo

Fresnillo is perhaps best known as the biggest silver miner on the planet. But it is also one of Mexico’s largest gold stocks by production, and in 2021 churned out more than 750,000 ounces of the yellow metal. This was down 2.4% year-on-year due to staff absences caused by Covid-19 and changing labour laws.

Fresnillo extracts gold from seven mines, the lion’s share of which comes from the Herradura open-pit asset, which has been in operation since 1997. Mexico is one of the world’s precious metal hotspots, and Fresnillo has another four development and advanced exploration projects in the works there.

Centamin

Centamin owns and operates the Sukari mine in Egypt and has exploration projects in Côte d’Ivoire and Burkino Faso. Its flagship asset in North Africa has been churning out the precious metal since 2009 and has another 12 years’ worth of life.

Recent studies also saw Centamin upgrade its mineral reserve estimates at Sukari to a net 1.1m ounces, the largest increase in a decade. This forms the backbone for the company’s plans to increase production over the next few years.

Centamin aims to eventually produce 500,000 ounces a year from Sukari, starting with between 430,000 and 460,000 ounces in 2022.

Caledonia Mining Corporation

Caledonia Mining Corporation’s sole operating gold project is the Blanket Mine in Zimbabwe. Thanks to the commissioning of a new central shaft output from the asset climbed 17% year-on-year to record highs of 67,476 ounces in 2021. And the gold stock is expecting metal output to increase again this year, to between 73,000 and 80,000 ounces, as underground development of the shaft continues.

Caledonia owns a 64% share in Blanket along with brownfield exploration and development projects. In late 2021 it acquired mining claims at Maligreen in the Zimbabwe midlands, which is home to a mineral resource with an estimated 940,000 ounces of gold.

Are gold stocks right for you?

Not all gold stocks pay a dividend. This is especially the case with smaller operators that run on tighter budgets and dedicate their capital to the expensive business of exploration, development and/or production.

However, a number of gold shares (like all of those mentioned above) can afford to pay dividends to their shareholders. This is something that gives gold-mining stocks an advantage over physical metal (like bars and coins) and financial instruments that only track movements in the physical gold price. Exchange-traded fund (ETF) iShares Physical Gold ETC is an example of one of these.

The perils of buying gold shares

The trouble with buying gold stocks, however, is that they expose investors to the often-problematic world of mining. Sudden power outages, for example, can play havoc with production and by extension a company’s revenues. Issues with bringing a project onstream can delay output and cause costs to balloon. Mining licences and export bans can be withdrawn at short notice in the areas in which a project is located. The list of potential problems is long.

This is why buying a major gold-mining stock could have advantages over more modest (or junior) operators. Buying a smaller-scale gold share has the potential to rocket in value if it finds a whopper of a gold resource. But these firms are less financially robust than the majors, which can have a large portfolio of mining interests and impressive cash flows that enable them to traverse such problems. This is why so many junior miners go out of business while the larger operators have excellent staying power.

Investing in an ETF

Of course, profits at major gold stocks can take a hit from one or more of those many mining industry hazards. However, an interesting way that investors can potentially lessen the risk is by buying a financial instrument like an ETF, which is made up of a basket of gold mining stocks.

Take the Sprott Gold Miners ETF for example. This aims to track the performance of dozens of larger gold shares, and its biggest holdings included Barrick Gold, Newmont and Franco-Nevada. The good thing about owning an ETF of gold stocks is that it also pays a dividend whilst allowing one to also spread the risk across several mining businesses.

Buying gold stocks for the long haul

Mining-related risks aren’t the only dangers of owning gold stocks, of course. Whether buying gold shares or the physical metal itself, one exposes themselves to the possibility of wild swings in the price of the shiny commodity. One might buy gold-producing stocks in the hope of soaring demand for the precious metal. But prices can go up and down, of course, and a collapsing gold price can be devastating for a company, and particularly for those cash-starved junior miners.

Take gold’s price performance over the past couple of years, for example. Bullion values soared by more than a quarter in 2020, hitting record peaks above $2,070 per ounce in the process too. They rose as Covid-19 supercharged demand for the safe-haven asset, and as a result profits at many gold-mining companies.

Yet gold fell 7% in 2021 as risk appetite returned to markets and investor interest in flight-to-safety gold eased, pulling earnings at most gold shares lower again. A nexus of macroeconomic, geopolitical and social factors interact in a complex way to dictate the movement of commodity prices. So predicting what direction precious metals will move in can be difficult business.

Many investors buy gold and gold-mining stocks, though, as an insurance policy for when economic conditions worsen. They hold them over the long term to diversify their portfolio and protect their wealth when prices of riskier assets drop through the floor. Gold-related assets are bought to provide peace of mind rather than a way to exploit price movements over a shorter time horizon.

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