Traditionally, there has been a strong correlation between the gold price and FTSE 100 mining stocks. The reason for this is that most miners have an active interest in the precious metal. If I mined gold and the price rose by 10%, then this would boost my revenue by a similar amount. Of course, should the gold price fall, my revenue would be hit as well. So with the move this week back above $1,800 per oz, should I be buying mining stocks?
Recent gold price movements
The gold price has been quite volatile over the past few months. It made highs above $2,000 last summer as investors rushed to find a safe haven during the pandemic. Since then, it has struggled. June was a particularly bad month, with the price dropping from above $1,900 to below $1,800.
There are two main reasons for this. The first one is rising inflation expectations. This is true in both the US and the UK as developed economies start to bounce back from the pandemic hit. Gold takes this as a negative, as it doesn’t pay out any interest. When inflation and interest rates are low, holding gold is a good alternative. But now that inflation is rising, and interest rates might follow suit, gold’s appeal could wane.
A second reason is that gold has been held for much of the past year as a safe haven due to the uncertainty around us. With countries now well along with vaccination efforts, the risk is reducing. The gold price is therefore falling.
The short-term bump back above $1,800 is helpful for mining stocks, but the medium-term move has actually been lower based on the above reasons. Therefore, I think I need to be careful when looking at mining stocks.
My thoughts on mining stocks
I think that the gold price is going to fall from here, and so would be selective about which mining stocks I buy. For example, take Polymetal International. It has nine producing asset locations, split between gold and silver. As a mining company, I would say this is quite concentrated between these two metals.
As a result, I think the Polymetal share price could be under pressure if the gold price doesn’t manage to hold on to the $1,800 level.
On the flipside, I could look at a mining stock such as Glencore. The company is one of the largest producers of copper, but it has a much broader range of metals that it markets. These include cobalt, nickel, zinc and lead. It does mine some gold, but not a huge amount. Therefore, I think this would be a safer stock for me to buy.
I could be wrong in my prediction about the gold price going forward. If the price rallies back to $2,000, then Polymetal shares will likely outperform Glencore. Yet I wouldn’t mind this too much, as I would have diversified my risk in case the gold price falls lower.
Ultimately, I need to look at each mining stock and see what exposure it has to gold before deciding whether to buy it for this reason or not.
