I think buying FTSE 100 stocks remains a good idea for me this Easter. And gold mining stocks in particular remain an attractive asset class to me as inflation gallops higher.
The latest consumer price inflation (CPI) reading in the US, for example, hit fresh 40-year highs in March. The reading of 8.5% announced this week was up more than half a percent month-on-month and just above broker expectations. Inflation is soaring around the world too, of course.
Gold is a commodity that rises in value when inflation spikes. Indeed, spot gold leapt to one-month highs around $1,975 per ounce following news of that explosive US CPI announcement.
I’m backing bullion prices to continue moving higher. And I have a couple of options to make money from this scenario.
Why I’d buy gold mining stocks
I can buy a financial instrument that tracks the gold price. I can buy physical gold, like coins or bars (and find somewhere to lock it up). Or I can buy a gold-producing stock, an asset whose revenues benefit from increasing yellow metal prices.
It’s a no-brainer, in my opinion. I’d buy a dividend-paying gold mining stock that allows me to capitalise on improving metal prices while providing income on my investment. That’s even though investing in a gold stock exposes me to the high costs and unpredictable nature of commodities production.
I’d do this by buying shares in FTSE 100 Mexican miner Fresnillo (LSE: FRES). I like this particular business for a few reasons.
Dual metal mammoth
Fresnillo is a major producer of both gold and silver. Demand for both of these precious metals tends to rise during times of economic, political and social crisis.
It’s not certain that metals prices will rise. A resurgent US dollar for instance could put gold and silver under pressure. But I feel there’s plenty of scope for investor interest to grow as inflation soars, the Ukraine crisis continues and the global economy stalls, to name just a few possible demand drivers.
I also like Fresnillo because of its silver operations. The shiny metal is a so-called ‘dual-role’ metal which means it plays an important part as both a safe-haven investment and an industrial commodity.
Buying Fresnillo shares then, allows UK share investors like me a chance to hedge their bets. Profits at the FTSE 100 firm could rise strongly during an economic downturn and during periods of recovery.
A FTSE 100 share I’d buy
Today, Fresnillo trades on a forward price-to-earnings (P/E) ratio of 18 times. It’s a reading that doesn’t look great value on paper. But it’s a valuation I don’t think is indicative of the solid outlook for precious metals prices.
I also don’t believe the firm’s current share price reflects the quality of its mining assets which span the length and breadth of Mexico.
Oh, and one final thing about those dividends. At current prices, Fresnillo carries a handy 2.7% dividend yield for 2022, jumping to 3.3% for next year.
