2 Ways To Play The Gold Rally: Fresnillo Plc And Randgold Resources Limited

Gold is within touching distance of a two month high after the Federal Reserve decided to stick its dovish monetary policy and offered upbeat noises on the state of the economy. Other investors, meanwhile, bought into the yellow metal on rising tensions in Iraq, as jihadist group Isis seized control of even more towns. Gold, which has no ties to any country or government, is seen as a safe haven during periods of geopolitical instability.

Iraq is set to remain a market factor after US President Barack Obama said he is sending military advisors to the country and hasn’t ruled out other military action. Gold presently stands at £770 per ounce, having made gains approaching 10% in 2014.

How to invest in gold

goldInvestors can gain exposure to the price of gold by owning an ETF, a type of security that tracks an index (like the FTSE) or a large group of assets (shares, bonds, precious metals).

The two largest gold ETFs are the ETF Securities Physical Gold fund (LSE: PHAU) (up 9% to $128 in 2014) and the Gold Bullion Securities fund (LSE: GBS) (up 8.8% to $126 in 2014).

The London-listed gold miners Fresnillo (LSE: FRES) and Randgold Resources (LSE: RRS) (NASDAQ: GOLD.US) have both performed better than that (up 13% and 27% respectively; comfortably outstripping the FTSE’s gains). As we can see the miners aren’t merely a proxy for the gold price, and their potential is much the same as any other company listed on the stock exchange. So you’re looking for a well-run miner that allocates capital effectively.

You can also hold physical gold coins or bars for which there are numerous established dealers.

Gold vs shares

On average shares will keep pace with inflation and, not only that, they pay shareholders a portion of earnings as dividends. Fresnillo, which operates six mines in Mexico, paid a 31p per share dividend in 2013. Fresnillo’s yield (3.6%) slightly beats the market average (3.4%).

You wouldn’t necessarily buy into a mining company strictly for income, as no dividend is ever guaranteed, least of all in a sector so volatile. But compared to nothing from investing in a gold ETF any sort of a paycheck is welcome.

Fresnillo shares trade at 40 times last year’s earnings. It’s worth noting, however, that conventional valuation metrics are less useful here. What matters is the likelihood and profitability of digging up the metal from the ground. Fresnillo is committed to the development of efficient, low-cost operations and the group’s portfolio is expected to yield returns even if metal prices slip. Randgold is enjoying considerable success on the production front, expecting an increase of between 25% to 30% this year.

Is gold poised to outperform?

Last year was a rough one for gold bugs, but so far 2014 has been bright. But remember -- sentiment can change in an instant. Therefore, you need to make sure your portfolio is balanced correctly.

So... where are the best opportunities in the market today?

To find out you should read our free report "What We think The Smart Money Is Buying Right Now". We identify the sector, markets and the trends that could underpin the movers of tomorrow.

To receive your free report simply click here.

Mark does not own shares in any company mentioned.