Gold mining stocks will soon shine

The history of gold mining is so littered with stories of reckless optimism, fraud and ruin that the sector is often ignored. Yet investing in gold miners can be hugely profitable when gold prices are rising.

941_MW_P20_gold_Alamy_credit

Nearly all the gold ever mined is still around

Credit: Ian Shaw / Alamy Stock Photo

A gold mine, according to Mark Twain, "is a hole in the ground with a liar on top". The history of gold mining is so littered with stories of reckless optimism, fraud and ruin that the sector is often ignored. Yet investing in gold miners can be hugely profitable when gold prices are rising.

Real gold bugs, misers and the end-of-the-world crowd are invariably sniffy. Gold miners are stockmarket investments, vulnerable to market sentiment, economic factors and operational uncertainties. For real security and diversification, say the purists, nothing beats the shiny metal. The life of a gold mine is finite, but physical gold has retained its purchasing power for thousands of years.

Gold miners: a consolidating sector

Investec's Global Gold Fund

Cheveley has built up a solid record, lagging competitors and the benchmark gold miners index in the boom year of 2016, but performing much better in the difficult conditions of 2018. The annualised three-year return is 17.5%, with five-year returns at only 2.6%, though those numbers are a steadier 7.9% and 5.1% in sterling.

The volatility of dollar performance largely reflects the gold price, which reached a record $1,890 an ounce in 2011, but fell to $1,100 in 2015. Recoveries to $1,350 in 2016 and again in 2018 were not sustained, but subsequent corrections were modest, and the price is currently hovering around $1,300. Cheveley expects the price to go higher in an environment of low-to-negative real interest rates and dollar weakness.

Gold: virtually indestructible

This in turn should have a disproportionate effect on the profitability of gold miners and hence their share prices. The historic rule of thumb was that the return from the mining sector was three times that of the gold price, but this is too simplistic. The rising cost of exploration has made the replacement of mined output expensive, and ore grades are falling, meaning that more rock has to be blasted for the same gold content.

In addition, gold miners are subject to the same cost pressures on labour, equipment and fuel costs as the rest of the mining sector, and it is easy for management to fritter away the advantages of higher prices on over-ambitious expansion. Hence the importance of investing in a diverse fund with moderate operating costs, good ore grades and ample reserves.

The ratio of the gold price to the total-return index for ten-year US government bonds is moving steadily higher, pointing to a shift to an era of structural inflation, says Charles Gave of research house Gavekal. Sooner or later, he will surely be right, making gold an attractive store of value and gold mining stocks a good investment.

Recommended

How to invest in energy and metals as tech stocks crash
Commodities

How to invest in energy and metals as tech stocks crash

It’s been a terrible week for stockmarkets. But not everything is crashing – “real” assets such as metals and energy are holding up well and should ha…
26 Jan 2022
A cheap investment trust with a good record
Investment trusts

A cheap investment trust with a good record

This cheap investment trust’s yield of almost 9% may look too good to be true, but should be sustainable, says Max King.
25 Jan 2022
The charts that matter: the start of the big crash?
Global Economy

The charts that matter: the start of the big crash?

US tech stocks fell further this week, more than 10% down on their November high. There’s what happened to the charts that matter most to the global e…
22 Jan 2022
Oil price hits seven-year high after Abu Dhabi attack
Oil

Oil price hits seven-year high after Abu Dhabi attack

The oil price hit a seven-year high after Houthi rebels in Yemen staged a drone attack on an oil storage site in Abu Dhabi.
21 Jan 2022

Most Popular

Shareholder capitalism: why we must return power to listed companies’ ultimate owners
Investment strategy

Shareholder capitalism: why we must return power to listed companies’ ultimate owners

Under our system of shareholder capitalism it's not fund managers, it‘s the individual investors – the company's ultimate owners – who should be telli…
24 Jan 2022
Three innovative Asian stocks to buy now
Share tips

Three innovative Asian stocks to buy now

Professional investor Fay Ren of the Cerno Pacific Fund highlights three of her favourite Asian stocks to buy now
24 Jan 2022
Temple Bar’s Ian Lance and Nick Purves: the essence of value investing
Investment strategy

Temple Bar’s Ian Lance and Nick Purves: the essence of value investing

Ian Lance and Nick Purves of the Temple Bar investment trust explain the essence of “value investing” – buying something for less than its intrinsic v…
14 Jan 2022