While stock markets have got stuck in the mud again, gold has become the hottest game in town. Prices have surged through the $1,800 per ounce marker to new seven-and-a-half year peaks. With that critical resistance level having fallen, a fresh surge to new record peaks seems only a matter of time.
I wouldn’t consider buying the precious metal itself though. Buying physical gold bricks or coins, or putting your money into a gold-backed exchange-traded fund (ETF), isn’t a bad idea as prices of the commodity rocket. It’s simply not the best way to maximise the returns you can make from booming gold demand, however.
This is where buying gold stocks comes into the equation. As I say, you can buy the metal itself, or ETFs that track the movements of the commodity price. But buying shares in gold-producing companies can let you do this as well as giving you the opportunity to receive some chunky dividends in the process. Reinvest them via a Stocks and Shares ISA and you’ll be surprised how much its value can rise.
Prices to hit $2,000?
Concerns over the economic implications of Covid-19 are the main driver of gold prices this week. You can’t open the papers without reading about second waves and lockdown measures being reintroduced in the US, China and elsewhere.
But coronavirus tension isn’t the only issue that’s supercharging bullion demand. There’s plenty of ongoing macroeconomic and geopolitical problems that are keeping, and could keep, gold prices shooting skywards. These include:
- Increasing trade tensions between the US and China and major economies in Europe.
- Accelerating central bank monetary stimulus that’s undermining the intrinsic value of paper currencies.
- Rising geopolitical instability (fuelled by Chinese and Russian expansionism, wars in the Middle East, increased global terrorism, and so forth).
- Exploding debt levels among developed nations.
Given all this, it’s no wonder that City analysts predict a bright future for gold prices. The boffins at Citi, for instance, seem to be upgrading their gold forecasts every other month. They now expect the safe-haven asset to average $1,825 per ounce over the next three months. And they predict gold will race to new record peaks above $2,000 per ounce in 2021.
Go for gold (stocks)
You can expect the share prices of London’s quoted gold miners to keep on exploding as well, then. FTSE 100 metal producer Polymetal International has seen its share price rise hitting six-week peaks on Wednesday thanks to this week’s charging bullion price. And FTSE 250 operator Highland Gold Mining has also risen to its most expensive since late May.
Despite these gains, particular stocks still trade at rock-bottom prices. At current prices Polymetal and Highland Gold trade on price-to-earnings (P/E) ratios of between 9 and 11 times for 2020. And this gives them extra room to rise in value over the short-to-medium term at least.
But as I said, the man benefit of buying stocks like these instead of gold itself is that investors can receive dividends too. And these two particular mining giants offer plenty for income chasers to get stuck into. For this year, they both boast gigantic yields of around 5.2%. And they should remain at elevated levels for some time to come, as rising gold prices push profits higher.
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Royston Wild has no position in any of the 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.