The price of gold has been pulling back for the past few weeks and taking the share prices of companies mining the precious metal with it. I think the reversal looks like a ‘normal’ correction after a big move up and probably isn’t much to worry about.
After strong gains in gold mining stocks in recent months, some stock traders may sell out, though, to lock in their profits. But in my opinion, there’s a longer game to play for those investors with more patience. And if you haven’t got any gold mining shares in your portfolio, the recent weakness could prove to be a good time to start looking for some.
The rocketing price of gold
The price of gold tends to advance when the economic times are uncertain. And the metal has risen from around $266 an ounce in 2001 to around $1,480 as I write. Indeed, we’ve lived through a troubled couple of decades and the gold trade looks like a good one. But I’d avoid buying the physical asset or speculating with a spread-bet directly on the gold price because gold itself won’t generate any additional value.
However, gold mining companies can add value when I’m holding their shares because they can mine the metal, discover more of it and pay me a dividend along the way while I’m waiting for the price of gold to rise. But it’s worth bearing in mind that gold mining stocks can fall and rise rapidly, exaggerating the movement of the price of gold. Another approach worth exploring is to buy into a tracker fund that follows gold mining shares.
Meanwhile, as well as the opportunity with the gold miners, I think big-cap dividend-paying stocks also look attractive. All the economic uncertainty in the air because of Brexit and other things could be keeping share prices depressed. But in many cases, the businesses underlying those shares with big dividend yields remain in rude health.
I reckon it would be a neat strategy to pick up a few shares in gold mining companies and balance those with some high-yielding big-cap stocks from the FTSE 100 index. Indeed, harvesting dividends from stable big-cap firms is a proven method of accumulating wealth. Over time, those dividends can add up, and if you plough them back into even more shares, you’ll be on the road to compounding your money.
But even with big-caps and big dividends, it’s possible to make a mistake such as buying shares in a company just before it announces a dividend cut. You can get around the problem of such single-company risk by buying a tracker that follows the fortunes of big-cap shares, such as one replicating the performance and dividend payments of the FTSE 100 index or maybe the FTSE 350 index, which includes coverage of those mid-cap firms in the FTSE 250 index.
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Kevin Godbold has no position in any share 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.