Gold is riding at record highs, but there are reasons to consider investing in the miners who find it instead, according to John Plassard, senior investment specialist at Mirabaud Group
Plassard laid out the arguments in a recent commentary note, and highlighted five stocks that fit the bill.
“Hardly a day goes by without investors talking about gold,” Plassard said. “There are many reasons for this craze: geopolitical uncertainties, central bank buying and strong corporate demand. However, there is another area that seems to have been forgotten and that could be worth looking into: gold mining.”
Plassard noted gold miners are lagging the metal they extract in price terms, even though historically there has been a ‘brotherly bond’ between the two. The gap is at least in part owing to the complexities of the gold extraction process, he said.
The lag between the price of gold going up at the miners’ share price could represent an opportunity for investors. Plassard listed several reasons this could be the case.
Firstly, some investors tend to simply forget or overlook the fact that gold comes from mines. There is no gold market without people finding and processing it.
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Next, Plassard said there is higher upside potential in miners than the metal itself, as well as downside.
“This is because their rise and fall depends not only on demand for their end product, but also on the management, and therefore the results, of the company that runs the mine,” he said.
Thirdly, there is more transparency, Plassard explained. He said: “In the same vein, we can add that with mining stocks, investors have immediate access to quarterly financial statements, periodic updates of management presentations and a host of additional data beyond the macroeconomic and technical drivers influencing gold.
“Having more fundamental data can therefore enable investors to make a more informed decision.”
The fourth factor Plassard highlighted is a gold mine’s management being ‘flexible’.
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“In an environment of falling metal prices and/or declining demand, a company’s management could choose to curb spending or restructure the business in order to reduce costs and bolster margins,” he said.
“In a context of rising prices, as is currently the case, this same management team could explore expansion opportunities in high-grade ore mines to increase production and profitability. Finally, another way for management to influence profitability is through mergers and acquisitions.”
Plassard further noted that miners can pay out a dividend, and shares offer much better liquidity than the metal itself.
For investors wishing to make a move in this direction, Plassard named five companies to consider. They are; Dundee Precious Metals, Anglogold Ashanti, Barrick Gold, Harmony Gold and Perseus Mining.
