As uncertainty builds, is now the time to buy gold or gold stocks?

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Gold bullion

Global political and economic uncertainty has increased significantly over the past 12 months. The rise of Donald Trump, right-wing political parties across Europe, Brexit, China's continuing economic problems and Russia's sabre-rattling have all added together to make the world a difficult place for investors to navigate.

And against this backdrop, the allure of gold as a safe haven has only increased.

However, holding physical gold has many drawbacks. Yes, the price of the metal may rise during periods of economic and political uncertainty, but during periods of relative calm, the price of gold tends to languish. What's more, owning physical gold can cost you money.

Time to invest? 

Owning gold mining stocks is an alternative to holding the physical product. Miners have two advantages over physical gold. For a start, they're leveraged to the price of gold with production costs usually far below the market price. A small increase in the market price may translate into a substantial increase in profit for a miner. Also as companies, gold miners look to return profits to shareholders. So rather than paying to own physical gold, you can pocket a nice dividend with gold mining shares.

Having said all of the above, investing in gold miners is no different from investing in any other business; you need to do your due diligence before taking a position. Some gold miners are drowning in debt with high production costs and labour issues while others are cash rich, well run and extremely attractive investments. 

A top gold pick

Randgold Resources(LSE: RRS) is one such company. The firm has grown over the past two decades from a tiddler to one of the world's largest gold miners. It will only take on projects with a 20% internal rate of return based on a gold price of $1,000 per ounce. This strict investment policy means the miner hasn't commissioned expensive projects and has a cash-rich balance sheet. 

At the beginning of November, it reported an 18% quarter on quarter increase in  net cash generated by operations pushing the group's cash balance to $361.1m. Randgold is forecast to record a rise in profitability of 50% in the current year and a further 33% next year. The shares trade at a forward P/E of 24 although they support a low dividend yield of 1%. 

Rising star 

Centamin(LSE: CEY) is trying to become the next Randgold. The company is having hit a record this year and being on track to produce 520,000-540,000 ounces of gold, up from the 439,072 ounces in 2015. 

Centamin's all-in sustaining cash cost for the period is expected to be in the range of $720-$750 per ounce down from $885 per ounce last year. At the end of the third quarter, the company had cash and liquid assets worth $417m. Pre-tax profit for the first nine months of 2016 came in at $208m, up from last year's $54m. 

The City is forecasting earnings per share growth of 119% for the full-year and based on these estimates shares in the company currently trade at a forward P/E of 8 and support a more attractive dividend yield of 3%. 

Make money, not mistakes

A recent study conducted by financial research firm DALBAR found that the average investor realised an annual return of only 3.7% a year over the past three decades, underperforming the wider market by around 5.3% annually thanks to poor investment decisions. 

To help you streamline your investment process, realise and understand the most common investor mis-steps, the Motley Fool has put together this new free report entitled The Worst Mistakes Investors Make.

The report is a collection of Foolish wisdom, which should help you avoid needlessly losing too many more profits. Click here to download your copy today.

Rupert Hargreaves has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.


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