Gold prices have taken a whack in recent months as Covid-19 vaccine rollouts have boosted investor interest in riskier assets. It’s too early to say that the yellow metal won’t soar to new record peaks, though. I think there’s still a great opportunity for UK share investors like me to make money on the back of bullion.
My positive outlook isn’t just because the public health emergency threatens (is certain, in many scientists’ opinions) to surge again, derailing the global economic recovery and a rebound in corporate profits in the process. Though of course this would lead to fresh bouts of panic-buying of flight-to-safety assets, the kind of rush that pushed yellow metal prices to record peaks above $2,000 per ounce last August.
Rising inflation to boost gold?
It’s because the threat of runaway inflation seems to be growing. Latest Consumer Price Index (CPI) data from the US showed the gauge leap 0.6% in March, up from 0.4% in February and the biggest jump since the summer of 2012. It looks like inflationary fears will keep rising too as central banks will likely keep interest rates locked around recent lows to aid the global economy. More quantitative easing by banks and governments can’t be ruled out either in a further boost to inflationary risks.
This plays into the hands of those involved in the production and retailing of precious metals. Why? Well prices of gold and other timeless ‘hard currencies’ increase when inflation chips away at the value of cash. Ultra-loose monetary policy in the US is particularly helpful in pushing gold prices higher too. This erodes the value of the dollar, making it therefore more cost effective for greenback-denominated goods like precious metals.
Playing the gold rush with cheap UK shares
I wouldn’t buy gold for my investment portfolio to play a fresh rise in precious metal prices, however. Owning the commodity itself (or a financial instrument backed by gold) doesn’t pay dividends. There are lots of UK gold-producing shares that do offer dividends, however, thus giving me the best of both worlds.
Take Polymetal International for instance. This FTSE 100 stock boasts an enormous 8% dividend yield. Meanwhile, Caledonia Mining Corporation, which is listed on AIM, offers an inflation-beating 3.2% forward yield. The beauty of these stocks, too, is that they both trade on bargain-basement price-to-earnings (P/E) multiples. They trade below the widely-accepted value benchmark of 10 times and below.
Of course these UK shares present investors with no little degree of risk. Gold prices may in fact sink if the fight against Covid-19 improves, leading to interest rate hikes by central banks. The business of mining metal is also fraught with risk that can smack production (and thus revenues) and cause costs to balloon. That said, I think Polymetal’s and Calendonia mining’s low P/E ratios and huge dividend yields still make them attractive stocks to buy today.