2 gold stocks I’d buy today and hold forever

One thing I’ll never do is buy gold itself as an investment, as it has no rational value — it’s essentially useless and just sits there looking shiny.

But though I’ve been wary in the past, I’m warming to the idea of buying gold mining stocks — if people want to buy the stuff, why not sell it to them?

As well as being the world’s largest primary producer of silver, Fresnillo (LSE: FRES) is Mexico’s second largest gold producer. And on Tuesday’s interim results, it’s looking pretty good.

With adjusted revenue up 11.5% from the same half last year, and EPS from continuing operations up 85%, the company was sat on cash, equivalents and short-term investments of $885m — and that allowed an interim dividend of 10.6 cents per share (a 23% hike).

Gold production was actually flat, though silver production was up by 11.2%, and increases in the price of the yellow metal (it’s up 12% so far in 2017) have helped push up profits.

Why I’d buy

I like Fresnillo’s valuation right now on several grounds. The shares are currently on a trailing P/E on 2016 results of around 35, which looks high. But this is a miner that is still bringing its operations on-line, with San Julián phase II construction completed on time and production started in July.

In addition, the turnaround at the company’s namesake Fresnillo mine is continuing, with production volumes up for the fourth successive quarter. If the expected rises in earnings come off, that P/E should come down rapidly.

Dividends are coming back too, and though the current yield is only likely to be around a couple of percent, decent cover by earnings should hopefully mean solid future rises.

I also like Fresnillo’s diversification through silver, so it’s not dependent on the price of one metal.

Low costs

The other gold miner I’ve been looking at lately is Randgold Resources (LSE: RRS), and I like it for the simple reason that it’s one of the most efficient gold producers in existence. At first-quarter time reported in May, cash production costs had fallen by a further 4% to $619 per ounce — and who wouldn’t want to pay that when you can sell the stuff for $1,260?

That efficiency is turning into nice rewards for shareholders, with 2016 showing increased production for the sixth year in a row — and a 38% profit rise led to a 52% boost to the annual dividend.

Forecasts suggest the dividend will almost double this year to 145p. On a share price of 7,050p that’s a yield of only 2%, but we’re looking at a strongly progressive policy here — analysts are expecting it to grow strongly in 2018 to a yield of 2.7%.

On that basis, I reckon a prospective P/E, based on 2018 forecasts, of 24 is actually not too stretching.

Not overpriced

Are valuations of gold shares dependent on continuing climbs in the gold price? Though it’s up 12% this year, it’s been flat overall for the past four years, and is actually down 32% since September 2011’s peak.

I really don’t see the gold price as overheated right now. In fact, with current levels of economic uncertainty — Trump’s America and a post-Brexit UK and Europe don’t look easy to predict to me — I see more likelihood of rises over the next five years than falls.

And I reckon Randgold Resources is a cash cow that can only get better.

Golden future

Exposure to the profits to be made from gold could help you to achieve early financial security.

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Alan Oscroft has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.