The gold price has shone in the pandemic, and trades 27% higher than a year ago. Yet I’d be wary of investing in the precious metal today. After hitting an all-time high of around $2,084 an ounce in August, gold has slipped to around $1,900. If we get a working Covid-19 vaccine and find a way out of the current malaise, it could fall further.
There’s another reason why I’m wary. There are no dividends or interest when you buy gold. By contrast, the FTSE 100 and FTSE 250 are full of stocks that pay dividends, even if many have suspended payouts this year. The following two shares give exposure to the gold price too.
Gold and dividends? That’s what can be achieved investing in gold mining stocks, but with an extra layer of risk. It not only brings exposure to gold price movements, but the operational performance of the mining company.
One way to play the gold price
FTSE 100-listed gold miner Fresnillo (LSE: FRES) has thrashed the actual gold price in recent months. While global stocks crashed in March, the South American miner took off. Its share price has almost doubled from 620p to today’s 1,220p.
I don’t expect it to continue climbing at that rate, especially since management recently cut full-year gold and silver production guidance. Covid-19 safety measures have hit output, while recent ore grades were lower than expected.
Fresnillo’s dramatic share price growth has shrunk the dividend yield. It’s now forecast to yield 1.5% next year, with cover of 2.2. Although Fresnillo would sit nicely in my portfolio, I wouldn’t necessarily buy it today. Thanks to the recent price surge, it looks expensive trading at 68.7 current earnings.
I’m sticking it on my watchlist though. Fresnillo’s earnings are forecast to rise 117% this year and 108% in 2021. That should slash the valuation to 14.5 times earnings and increase the yield to 3.4%. There may be a better time to take a position.
The Centamin share price tempts me more
While so many FTSE 100 companies have cut their dividends this year, FTSE 250 miner Centamin (LSE: CEY) doubled its payout in August. The spiralling gold price helped first-half profits more than triple, from $59.6m to $191.1m.
The Centamin share price has actually fallen by a third over the last month, after it suspended operations to stabilise its Sukari mine in Egypt and warned 2021 gold production would fall. This confirms my point that the gold price isn’t the only factor affecting gold mining stocks. However, this leaves Centamin trading at a less-demanding P/E ratio of 23 times earnings, and a forecast P/E of just 12.9. Earnings per share are predicted to grow 77% over the next year.
Given Fresnillo’s toppy price I reckon Centamin could offer a better way of playing the gold price, especially given its impressive forecast dividend yield of 7.7%.
