The price of gold has soared over the last year, rising by more than 20% to nearly $1,500 per ounce.
Gold bulls will point to global economic uncertainty and say that the yellow metal hit a high of more than $1,900/oz. in August 2011. That’s true.
The problem with owning gold directly is that if the price of gold doesn’t keep rising, you won’t make any money. As an investment, that seems risky to me, especially as my research suggests gold is starting to look more overbought than at any time since August 2011.
My top gold pick
I’d prefer to invest in stocks that provide exposure to the price of gold, while also providing an opportunity for profit and income even in a sideways market.
My top pick in the gold sector is FTSE 250 firm Centamin (LSE: CEY), which produces gold from its Sukari mine in Egypt. Like most gold miners, Centamin has benefited from the run-up in the price of gold over the last five years. But cuts to production guidance have seen the shares drift lower since 2017.
I think this could be a buying opportunity, especially as the group’s financial performance remains healthy.
2 reasons why I’d buy
The miner’s difficulties have been caused by various geological factors. It’s not unusual for mines to go through periods of lower production for such reasons. Performance is expected to improve in 2020 and gold production is expected to rise by a mid-estimate of about 7%.
City analysts expect this to translate into a 39% rise in earnings, as per-ounce mining costs should be lower with higher production. If the firm delivers on these forecasts and the price of gold remains stable, I’d expect the shares to perform well over the next year or so.
The other attraction for me is the high-yield income available from Centamin shares. Forecasts suggest a yield of 5.1% for 2019, rising to 6.3% in 2020. Although I don’t expect this year’s payout to be fully covered by free cash flow, the company has no debt and a cash balance of $289m. I’m quite happy to see some of this surplus cash returned to shareholders, supporting the dividend.
I don’t see much value among gold producers at the moment, but I believe Centamin could be one of the best opportunities in this sector.
What about silver?
Silver benefits from industrial demand as well as jewellery and investment activity. But the UK market provides limited choices if you want to invest in silver miners.
One option is Hochschild Mining, which operates in South America. Analysts expect the group’s adjusted profits to double this year thanks to production growth and a sharp rise in the price of silver.
Further expansion is expected in 2020, when forecasts suggest the group’s earnings will rise by 50%.
This year’s strong performance has improved cash generation, allowing the company to repay almost all of its debt by the end of September.
But although I’m encouraged by growth forecasts for the business, I feel that Centamin’s proven track record of high profit margins and strong cash generation is a better option for most investors. That’s where I’d put my cash.