It is often argued by investors that timing is everything. After all, you can buy shares in a great company, but pay the wrong price and it can take years for them to come good. Similarly, selling a stock just before improved performance – even if the outlook was downbeat upon their sale – and you may regret the decision for a very long time. As such, it pays to not only focus on the quality of a company, its prospects and financial standing, but also whether the present time is the right moment to increase your exposure to that…
It is often argued by investors that timing is everything. After all, you can buy shares in a great company, but pay the wrong price and it can take years for them to come good. Similarly, selling a stock just before improved performance – even if the outlook was downbeat upon their sale – and you may regret the decision for a very long time. As such, it pays to not only focus on the quality of a company, its prospects and financial standing, but also whether the present time is the right moment to increase your exposure to that company, in that industry, and at that price.
Clearly, investing in gold is a lot less popular than it was a handful of years ago. Back then, there were fears about the sustainability of the financial system that was in place, with a number of commentators stating that money could become worthless and that ‘real’ currency was the place to be, with the price of gold increasing rapidly and reaching an all-time high of $1837 per ounce in July 2011 as a result.
Since then, the outlook for the global economy has improved and fears surrounding the state of the financial system have subsided somewhat. As such, the price of gold has fallen to its current level of $1195 per ounce. Looking ahead, though, demand for gold could increase if new fears surrounding the sustainability of the Euro and even the EU in its present form come into being over the next few years, with there being the potential for a Grexit and a Brexit over the next two years.
Therefore, investing in gold-mining companies could be a sound idea. One of the most appealing at the present time is Centamin (LSE: CEY). Its share price has risen by 20% in the last six months and, with it being expected to post a rise in its bottom line of 32% next year, there is a clear catalyst to increase its exceptionally low price to earnings (P/E) ratio of 11.5. And, with Centamin treading below net asset value, there is a sufficient margin of safety on offer even if its guidance is downgraded over the medium term.
Right Sector, Wrong Stock
Of course, gold isn’t the only commodity with price appreciation potential. Demand for lithium is set to rise at a double digit rate per annum over the medium to long term, as the use of batteries is broadened and extended to replace the use of fossil fuels in a range of activities; from cars to electricity storage. So, investing in this space could be a sound move.
However, investing via Rare Earth Minerals (LSE: REM) does not appear to be a logical move. That’s simply because the timing could prove to be wrong, since Rare Earth Minerals has a very long way to go before it becomes a viable business. Notably, it is awaiting the results of its optimisation study to determine the size of its available reserves and, while the news flow in this respect could be positive, it presents something akin to a binary trade, since disappointment could lead to significant weakness in its valuation.
So, while the timing seems to be right to buy Centamin, with it being cheap, offering growth potential and the prospect of a higher gold price, Rare Earth Minerals seems to be a stock to avoid. Certainly, lithium has huge growth potential, but Rare Earth Minerals’ share price is overly dependent upon the results of a study which is simply a known unknown, thereby making its risk/reward profile relatively unappealing.
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Peter Stephens has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.