Gold mining shares are taking on a fresh lustre after larger-than-expected dividend increases from FTSE 100 firm Randgold Resources and FTSE 250 members Centamin and Acacia Mining, which is the best performer in the FTSE All-Share today with a near-7% gain.
Russ Mould, investment director at AJ Bell, comments:
“Rising gold prices have enabled gold miners to capitalise upon the cost efficiencies they have been working hard to seek ever since the precious metal peaked near $1,900 an ounce in 2011.
“Gold has been supported by inflation’s steady creep higher, ultra-loose monetary policy in the UK, Japan and Europe, and some of the geopolitical uncertainty prompted by President Trump’s initial foreign policy forays. As a result the precious metal gold has been holding firm around $1,230 an ounce, having rallied from 12-month-lows of around $1,125 in December.
Source: Thomson Reuters Datastream
“Investors who feel that their portfolio would benefit from some exposure to gold have four ways in which they can access it.
“First, investors can buy an exchange-traded commodity (ETC), such as ETFS Physical Gold, which is designed to track movements in the underlying metal price and deliver performance, minus running costs. It is possible to buy versions which deliver performance in dollar or sterling terms, if you are worried about currency movements.
“Second, you can buy gold mining shares. There are five major gold miners listed on the London Stock Exchange’s Main Market (for which reliable forecasts are available) and 34 more quoted on AIM, with a combined market value of some £17 billion. Randgold is the second-best performer in the FTSE 100 over the past three months. The table below looks at the Main Market stocks, although it is also possible to buy leading gold miners such as Newcrest, Newmont and Barrick Gold on the US, Canadian, South African or Australian stock exchanges.
profit (£ m)
Source: Digital Look, consensus analysts’ forecasts
“Third, to manage stock-specific risk, and potentially glean exposure to overseas miners you can buy an actively-managed fund which specialises in precious metal miners. In return for a fee, you will gain access to a wide pool of gold miners, selected by an expert in the area. Options here include BlackRock Gold and General and JP Morgan Natural Resources, although they will not be pure gold plays and will come with exposure to silver and other basic materials too.
“Fourth, to manage stock-specific risk (and potentially fees) you can buy a passively-run tracker fund, or exchange-traded fund (ETF), designed to follow a basket of gold mining stocks and deliver their performance, minus the product’s running costs. Examples here include the iShares Gold Producers, Van Eck Vectors Junior Gold Miners and ETFS DAXglobal Gold Mining ETFs.
“That said, gold is not guaranteed to suit every investor’s style or strategic goals and there are three arguments against using it in portfolios:
“It has limited industrial use, generates no yield or cash and thus has no intrinsic value at all according to investors like Warren Buffett.
“It becomes more expensive to own as interest rates rise and cash returns improve, as you have to pay to store and insure it if you own the physical stuff. Gold therefore tends to do badly when interest rates are rising (as they are in the USA, albeit very very slowly).
“The markets currently believe that President Trump’s reform programme will succeed in getting the economy back on track. If that is the case then there is no need for the sort of portfolio insurance offered by gold, which may again then look like a ‘barbarous relic’ as former Chancellor of the Exchequer and Prime Minister Gordon Brown once described it.”