The safest bet

Barrick Gold (NYSE: GOLD) is one of the largest gold miners in the world. It owns a majority share of the Nevada Gold Mines, the largest gold-producing mine in the world. The miner has completely cleared its $13bn of debt since 2013 and has assets of $5.2bn in cash and a $3bn line of credit. The miner has even recommended $750m of surplus cash be returned to shareholders this year. In addition it pays out a small dividend of 1.7%.

Its share price is now at $20.90, down from a high of $29.75 in September 2020. During the market crash in March last year, Barrick was one of the least affected stocks. 

The main risk to Barrick’s share price is a strong global post-pandemic economic recovery. This miner seems too big to fail, but if worldwide economies improve and inflation risks subside, investors may pull money from gold stocks into more lucrative options. 

More adventurous gold stock

Centamin (LSE: CEY) has experienced a volatile couple of years. In April 2019, the share price was at 80p; in August 2020, it was at 220p. It is currently at 104p. The company operates the Sukari gold mine in Egypt, and expects to generate over 400,000 ounces of gold this year. Centamin is promising a 6.1% dividend return this year, with a dividend policy that heavily favours investors. It has no debt, and $331m in liquid assets that will help it to cope with fluctuations in the gold spot price. It also has big plans to expand African mining operations over the next few years.

The main concerns are the share price volatility, political instability in Egypt, and the risks associated with the development of new mining assets. 

Hope to strike gold

Scotgold Resources (LSE: SGZ) could be a potential goldmine, but comes with significant risk. Its share price fell from a high of 151p in October last year to just 61p today, a reduction of almost two thirds. Buying in at this price point could be attractive.

I think the success of the company depends on the Cononish gold mine in Scotland. CEO Phil Day recently stated that “the potential is huge – that there is gold everywhere.” The company aims to mine 10,000 ounces of gold this year, and more than double production in 2022. It is planning to expand operations across central Scotland over the next decade. I would only invest a small amount as this is a highly speculative stock that depends on the success of one risky mining operation. However, early investors could make big returns on this gold stock if the mine succeeds.

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Unsurprisingly, the company’s share price mirrors volatility in the gold market. So what’s moving the price of gold? Given the cost and time involved in exploration and mine construction, the year-on-year change in gold supply is unlikely to fluctuate notably. Consequently, price is driven mainly by demand and macroeconomic conditions. As economic conditions worsen, the price of gold often rises because it is seen by some as a ‘safe-haven’ investment, and a hedge against inflation.

Accordingly, the Covid-19 pandemic drove up the price of gold in 2020 to a peak of $2036.58 per ounce in August. And the average price in 2020 was 25% up on that in 2019. That this volatility was owing to economic uncertainties is evident from the fact that consumer demand in 2020 was down on 2019.  The World Gold Council reported a 34% drop in gold jewellery sales in China and India – countries that are collectively responsible for half of all such demand globally. This was accompanied by a slow-down in central bank net purchases of gold in 2020, positively impacting mining stock.

All of the buoyancy in the gold market in 2020 translated to a similar rise in Barrick Gold’s share price, peaking at $29.6 in August of that year. However, what followed was a pretty continuous slide, such that the share price had fallen by 37% in a little under six months, reflecting the much less precipitous decline in the price of gold through February 2021. This fall in the price of gold was likely linked to optimism around Covid-19 vaccination programmes and the beginnings of recovery from the pandemic. That was in February.

What’s happened since is something of a reversal in fortunes, as the short-term concerns around inflation look increasingly justified. US consumer prices in March continued their four-month rise, and the rate of inflation is at a two-year high. Further, there have been a number of high-profile side-effect concerns, which have put a dent in the rate of vaccination uptake (with AstraZeneca and more recently Johnson & Johnson in the frame). As pessimism has set in, the decline in the price of gold has levelled off, and is showing signs of resurgence. And in a little over a month, Barrick Gold’s share price rebounded by 19% from its lowest ebb in February to $22.23.

My expectation is that this is an opportunity to capitalise on what might very probably be a short-term spike in mining stock. Do note, though, that in the long term, returns on gold have not compared favourably with the S&P 500 index, so there’s a huge amount of risk involved in choosing when to exit. Being in it for the long haul can offer some level of portfolio diversification. And, of course, there are a number of investment funds that hedge the risk for you.

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Consequently, the Barrick share price rocketed 15% in a matter of days, as many investors imitated Buffett’s play. But should UK investors follow suit? Let’s take a look at this in more detail.

Analysing Warren Buffett’s recent move

You may be wondering why Warren Buffett’s purchase comes as such a surprise. After all, the price of gold has been on a tear recently and the macroeconomic climate gives no indication of that slowing down. But the answer lies with his previous attitude towards gold.

The investing genius has long been a critic of investing in the commodity. In fact, he’s often directly spoken out against gold. Instead, he prefers pouring cash into high-quality American businesses. With that in mind, it’s clear to see why investors’ ears have pricked up at the announcement.

However, while the purchase is certainly a nod in favour of the commodity’s prospects, it’s important to note that Warren Buffett hasn’t explicitly bought gold. Rather, he’s bought shares in a company that mines gold.

It’s no ordinary company either. Barrick Gold is a titan of the mining industry, with 16 operating sites in 13  countries. The investment case is strong, and the company has good-quality fundamentals. Overall, the underlying business is solid which, in part, explains Buffett’s decision to invest in the company.

What this means for UK investors

Having considered Warren Buffett’s recent move, let’s take a look at the implications for investors situated in the UK. Given the uncertain economic environment, rising US-China tensions and the prospect of a second wave of coronavirus infections, share prices are likely to remain volatile for the foreseeable future. This bodes well for the price of gold to continue to thrive.

However, the commodity doesn’t pay a dividend and its price appreciation is uncertain. Therefore, investors may feel more comfortable approaching gold in a different manner. For instance, by gaining exposure through a mining company, which could even prove to be a superior way to generate favourable returns in the long run.

What’s more, with a vast array of gold mining stocks listed on the London Stock Exchange, British investors are spoilt for choice if they want to emulate Warren Buffett. When pressed for my top pick though, I’d throw my weight behind Polymetal, a top-10 gold producer that’s outperformed most of its peers over the years. With nine gold producing mines located across Russia and Kazakhstan, the company appears set to prosper over the long term.

Alternatively, you could place your money in a fund that’s exposure to most of the best gold mining stocks out there. My go-to would be the iShares Gold Producers UCITS ETF, which has a 9% weighting towards Buffett’s chosen pick, Barrick Gold.

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