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This is 2020’s best performing gold stock. Is it too late to buy it now? Here’s what I think

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Stock markets crashed hard this year and are still picking up the pieces. But what’s true for stock markets as a whole isn’t true for each and every share. At the Motley Fool we have pointed out time and again stocks that have performed exceptionally during this time. Among these are gold mining stocks.

As stocks became riskier investments, suddenly gold’s value as a safe-haven asset became more apparent. And with that, the fortunes of gold miners. Like Petropavlovsk (LSE: POG), which operates mines in Russia. According to IG research, it was the best-performing gold stock in the first half of 2020, with a share price return of 122%. 

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Gold price run-up to continue

POG has run up another 33% since and is now sitting close to multi-year highs. But I think there’s a likelihood of more gains. The reason is this: world economy’s prospects are looking slightly better. But we are still far from robust growth because there’s still pandemic-related unpredictability to deal with. Forecasts also expect higher prices for the yellow metal going forward. 

Rising gold prices can be good for mining stocks, but only if the companies themselves are well positioned to benefit from the trend. This isn’t always the case. Consider the FTSE 250 company Centamin Mining. Its share price dropped a few days ago after it slashed production forecasts on detecting movement in one of its mine’s walls, making operations there unsafe. This is an operational risk that comes with the business. Its unfortunate for CEY that it came at a time when gold stocks are in favour. On this front, however, POG is well placed. Its production is robust, and it’s a profitable company as well. 

The downsides

There are downsides to POG, however, when compared to other gold stocks. One, its earnings ratio is high at around 41 times. The FTSE 100 precious metals miner, Polymetal International, has a ratio of 11.3 times by comparison. Two, unlike either Polymetal or Centamin, POG doesn’t pay dividends. CEY’s dividend yield is presently at 6%, admittedly impacted by the fall in share price, but it was noteworthy even earlier. For investors that would like a blend of both growth and income, I think other gold miners can be more attractive than POG. 

Further, if overall conditions improve and gold prices stabilise, the price of gold stocks could stop rising as well. One look at POG’s long-term price chart is enough to support that there can be periods of little increase in stock price. I think gold stocks, especially with all the rise they have had already, should be seen as a very long-term play. And by that I mean, the chance to sell them may arise only when the next big recession comes around. There could be plenty of opportunities to sell at highs over the next year, so if you have been invested for a long time I can understand if you’d want to make some profits from investments. But for a long-term investor who wants to buy the stock now, it’s a game of patience.

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Manika Premsingh 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.

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