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Investing in gold miners – what you need to know

A closer look at how an investment in gold miners differs from gold itself.

Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

Last week Yamana Gold, a Canadian Gold Miner valued at $6bn, announced it’s in the final stages of a secondary listing on the London Stock Exchange. Yamana’s arrival marks the return of a large scale gold miner to the UK stock market after Randgold was acquired by Barrick last year.

Gold is often seen as a ‘safe haven’. It’s a physical asset, not easily created or destroyed, and expected to broadly keep pace with inflation over the very long term. However, that doesn’t mean gold is without risk. At times over the last ten years the gold price has been down as much as 45%.

Nonetheless, a troubling economic backdrop with safe haven rivals offering zero to negative yields, means it’s been gold’s time to shine.

It’s continued to reach new highs, moving above $1,900 an ounce and surpassing the all-time high of $1,920 set in 2011.

Gold price ($)

Past performance isn’t a guide to the future. Source: Thomson Reuters Eikon, 27/07/2020

How can I invest in gold?

Buying and storing physical gold bars is expensive, not to mention impractical. So lots of investors choose to hold gold through specialist exchange traded funds (ETFs).

Holding shares in companies that mine gold can also be an option.

We’ve pulled together some of the key things we think investors need to know. This article isn’t personal advice. If you’re not sure an investment is right for you seek advice. Investments rise and fall in value, so you could get back less than you invest.

How are gold miners different?

Miners have the potential to both outperform and underperform the gold price. They’re a leveraged play on gold price.

This feature exists because, in general, the cost of getting gold out of the ground is the same regardless of what the gold price is doing. If costs are kept the same but the gold price rises that’s good news for profits.

When the price is lower profits will be lower, and if it falls below the cost of production, the company might even be loss making. That’s one reason we generally prefer larger, more efficient gold miners. They can stomach a bigger fall in the gold price before dropping into the red.

Less efficient and higher cost miners, often smaller ones, whose costs are closer to the actual gold price will produce returns that are a more exaggerated version of movements in the gold price. A rise in the gold price will make them dramatically more profitable, but a fall in the gold price works the other way. Price is even more important to these miners.

Barrick - gold price vs cost of mining

Source: Barrick Gold Annual Reports 2017 – 2019

They can pay dividends

Gold doesn’t pay an income, but gold miners can. A well-run miner might be able to maintain profitability over the cycle, meaning it can pay a steady dividend to investors. Like any dividend though investors should be prepared for volatility, and that’s particularly true in the cyclical world of mining. Past income doesn’t indicate what you’ll receive in future.

The ability to pay dividends has also contributed to gold miners being able to outperform a simple gold investment. Dividends boost investors total return. Past performance is not a guide to the future though.

Gold miners come with company risks

By investing in a gold miner you’re not just getting exposure to the gold price, but a company’s performance too. Aside from the gold price, a miner’s performance is dependent on how much gold a company produces and its ability to keep costs down.

Location also plays a big role here. Gold mining is a global business, spanning developed and developing countries. The latter tend to be higher risk, as political upheaval can cause significant disruption.

We saw this with Acacia Mining (now fully owned by Barrick) in 2017, when shares tumbled as the Tanzanian government, suspecting tax evasion, imposed an export ban and changed mining laws. The dispute was only resolved this January.

Global Gold production

Source: World Gold Council, Accessed 23/07/2020

Gold miners come with currency risks

Gold is priced in dollars but mined globally. That means a gold miners costs are denominated in local currencies, the Tanzanian shilling for example, but its revenues are linked to the dollar.

If the Tanzanian Shilling were to strengthen against the dollar, a Tanzanian miners cost would increase relative to its dollar denominated revenues. That would be negative for profits.

This currency exposure is a particular problem for companies with emerging market mines. Emerging market currencies can be very volatile, and can make cost management challenging.

Our tips for investors

Investing in gold won’t be suitable for everyone but if you do choose to invest, it should only take up a small proportion of your portfolio, we suggest a maximum of 5%.

Like any share, an investment in a gold miner brings with it both company specific and external risks. We look for businesses that are in control and minimise company specific risks. For gold miners this would be things like good cost control and operating in mining friendly locations.

The gold price however, is the key determining factor in a gold miner’s performance and very much out of their control – determined by a whole host of global economic factors. While the performance of gold mining stock is linked to the gold price, every company’s performance will differ.

Funds like BlackRock Gold and General could give you a more diversified approach than picking one or two shares. The fund is managed by a professional fund manager who spreads investors’ money across different mining companies. It includes investment in smaller companies and those in emerging markets which increases risk.

More about BlackRock Gold & General, including fund charges

BlackRock Gold & General Key Investor Information

Search for gold ETFs

Search for funds that invest in gold miners in the ‘Specialist’ sector

Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Thomson Reuters. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Past performance is not a guide to the future. Investments rise and fall in value so investors could make a loss.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research disclosure for more information.


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    Important notes

    This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

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