Over the last few days, gold has proven itself as an excellent hedge for investors against market turbulence.
While stock markets around the world have taken a tumble following concerns about rising US inflation and bond yields, the price of gold has remained relatively unchanged and has certainly not seen the same type of volatility as equities.
Unfortunately, owning gold directly can be a complicated and expensive business, which is why gold mining stocks tend to be a better buy for investors. Randgold Resources (LSE: RRS) is in my view one of the sector’s best bets.
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From strength to strength
Today the company announced that for the seventh year in a row, it has managed to increase its gold production. Output for the year to the end of December increased by 5% to 1.315m ounces while the total cash cost of each ounce mined decreased by 3% to $620.
Thanks to a higher average gold price throughout the year, total profit for the period rose 14% to $335m with the group’s overall net cash on the balance sheet rising 39% to $720m (along with the current market capitalisation of £6.6bn). With this sizeable financial cushion in place, management has decided to double the full-year dividend to $2 per share (or around 1.4p).
A gold proxy
The investment thesis for Randgold is simple. The shares offer a proxy on the price of gold. Operational gearing means the firm’s investors will profit substantially if the price of gold moves suddenly higher, and unlike owning the commodity directly, rather than having to pay to store gold, the shares currently support a dividend yield of 2%. This isn’t much, but considering the annual charge for storing gold could be as high as 1%, it makes a big difference.
Randgold’s smaller peer Centamin (LSE: CEY) has all the same qualities as its larger sector peer but is a cheaper investment. Compared to Randgold, which currently trades at a forward P/E of 27, shares in Centamin trade at a forward earnings multiple of only 18. The stock also supports a much higher dividend yield of 4.1%, which once again, when compared to the 1% usually charged to store physical gold, looks to be a high return (it is around 0.9% above the market average dividend yield as well).
The stock’s low valuation can be attributed in part to Centamin’s poor performance for fiscal 2017. Thanks to higher than expected fuel costs, its all-in sustaining cost of producing an ounce of gold rose 14% during the period. These higher costs resulted in a 13% fall in core profit.
Still, Centamin is run conservatively, and management has been using the rising gold price to fortify its balance sheet. At the end of fiscal 2017, the company had a net cash balance of $360m, which works out at around 14% of the firm’s overall market capitalisation.
Time to get defensive
Gold is one of the world’s most defensive assets, and as a result, gold miners are themselves a great defensive play. As I’ve written before, due to rising global geopolitical and economic uncertainty, I believe gold is an excellent hedge against risk in 2018. Both Centamin and Randgold offer the same kind of hedge with the added bonus of dividend income.
