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.


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.

Subscribe to MoneyWeek

Become a smarter, better informed investor with MoneyWeek.

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.

Advertisement - Article continues below

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.




Commodities look cheap

Gold may be on a bull run, but industrial commodities, including copper, zinc and aluminium, remain cheap.
17 Jan 2020

Don’t panic about Iran – but don’t sell your gold either

Markets have reacted calmly to the tension between the US and Iran. But don’t get too complacent. It’s still a good idea to hold on to some gold as in…
9 Jan 2020

Here’s how gold could rise above $7,000 an ounce

That the gold price could hit $7,000 an ounce is a logical and plausible possibility, says Charlie Morris. Here, he explains how it could get there.
30 Dec 2019

Gold is in a bull market – and it could have much further to go

Many investors forget that gold is still the best-performing asset of this century, says Charlie Morris. It could also have much further to go.
27 Dec 2019

Most Popular

Stocks and shares

Do you own shares in Sirius Minerals? Here’s what you need to do now

Mining giant Anglo American has proposed a cash takeover of Yorkshire-based minnow Sirius Minerals. Unhappy shareholders must decide whether to accept…
20 Feb 2020

Gold is at its highest level in years – here’s how to invest

Gold's rise at a time when the dollar is unnervingly strong isn't unheard of – but it is curious. John Stepek explains what's going on, and what it me…
21 Feb 2020
Share tips

Share tips of the week

MoneyWeek’s comprehensive guide to the best of this week’s share tips from the rest of the UK's financial pages.
21 Feb 2020

Is 2020 the year for European small-cap stocks?

SPONSORED CONTENT - Ollie Beckett, manager of the TR European Growth Trust, on why he believes European small-cap stocks are performing well.
12 Feb 2019