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Best gold stocks: I’d buy these 5 London-listed miners

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I’ve always owned some physical gold, but I’m now also considering buying what I think are the best gold stocks on the London market. Here, I’ll discuss the risks and rewards of owning shares in gold-mining companies. I’ll also explain why I think now could be a good time for me to get into the miners.

Gold and gold miners

Gold has long been considered a good store of value. The price of the yellow metal sometimes deviates from the inflation rate due to short-run factors. But it’s been a reliable hedge against inflation over the long term. It can also provide some protection against sudden economic shocks or crises.

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The best thing about gold stocks — in theory — is that they are a levered play on the price of gold. This is due to miners’ operational gearing. If I buy gold at $1,800 an ounce and it goes up to $2,000, I make a gain of 11%. If a gold miner has costs of $1,000 an ounce, it makes an $800 profit with gold at $1,800 but a $1,000 profit with gold at $2,000 — a 25% increase.

Of course, operational gearing works in reverse if the gold price falls rather than rises. However, given a long-term rising price, a profitable miner should be able to juice my returns, including via the distribution of surplus profits as dividends.

There’s been an extraordinary explosion of money-printing and debt, coordinated by central banks, in recent years. I reckon this debasement of paper currencies provides a strong base for gold for many years to come. Of course, there’s a risk I could be wrong. In which case, the outlook for miners may be less rosy than I envisage. There are other risks too.

Risk context for my best gold stocks

Some things are largely outside a mining company’s control. Most of the London-listed gold miners operate in countries with above-average political risk. There’s also currency risk. A miner’s costs are in the local currency, while the gold it sells is priced in dollars.

With this in mind, I think the best gold stocks should provide me with extensive geographical diversification. By owning a share of assets located across a range of countries, I can mitigate political and currency risk.

My best gold stocks to buy

I’ve cherry-picked five London-listed gold miners. In combination, I think these fit the bill well. In addition to providing me with geographical diversification, they’re all profitable and paying dividends. The table below summarises some of the key data that I think makes them my best gold stocks to buy.

 

Producing assets

Share price (p)

Forward P/E

Forward yield (%)

Centamin

Egypt

106.8

12.8

6.5

Pan African Resources

South Africa

17.62

10.0

5.0

Polymetal International

Russia and Kazakhstan

1,583.5

9.8

6.4

Shanta Gold

Tanzania

15.25

10.4

2.2

Yamana Gold

Canada, Argentina, Brazil, and Chile

342.5

12.1

2.7

In summary, while risk can never be eliminated, I think the combination of these five stocks offers me some protection against political and/or currency risk in any one country. The modest average price-to-earnings (P/E) ratio (11) and chunky average dividend yield (4.6%) add to my belief that these are probably the best London-listed gold stocks for me to own.

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G A Chester 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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