Gold’s on fire at the moment and charging towards the $3,000 per ounce mark. As a result, many gold mining stocks are doing well. Is it worth buying a few of these stocks for my Stocks and Shares ISA or Self-Invested Personal Pension (SIPP)? Let’s discuss.
The advantage of investing in gold stocks
When the price of gold is rising, as it is now, gold mining companies can be great investments. That’s because they’re essentially a leveraged play on the precious metal. Often, rising gold prices can lead to a sharp increase in profitability for these companies. This is the result of revenues rising at a faster pace than costs.
A good example here is Pan African Resources (LSE: PAF) – a small gold miner that’s listed on the London Stock Exchange. For the 12-month period to the end of June 2024, its revenue climbed 16.8% year on year. However, its profit for the period jumped 30.2%. In other words, profits rose at a much faster pace than revenues.
When gold prices are high, miners can also generate substantial profits. Because often the cost to produce gold is far lower than the price it can be sold at. Going back to Pan African Resources, its ‘all-in sustaining costs’ for that financial year were $1,354/oz. So with gold in the high $2,000s, it was making a lot of money ($79m profit for the year on revenue of $374m).
Another thing worth mentioning is dividends. When gold miners see a big increase in profitability, they often reward shareholders with bigger dividends. We can see this with Pan African Resources. Last financial year, it raised its payout from ZA18 cents to ZA22 cents – an increase of 22% (the yield’s currently around 3%).
Gold miners can be risky
Gold miners can also be quite risky investments however. I learnt this the hard way around 15 years ago when many of these stocks tanked during the 2008/2009 Global Financial Crisis.
If the price of gold falls, these stocks are likely to fall too (as investors pencil in lower profits). It’s worth noting here that gold has had a huge run over the last year, so there’s a chance of a pullback in the near term.
Another risk to be aware of is operational setbacks. With these companies, there are a lot of things that can go wrong here. Adverse weather, equipment failures, and staff strikes are some examples. These can all lead to share price weakness.
Given that lots of things can go wrong, gold mining stocks don’t always do well when the price of the commodity is rising. If we look at Pan African Resources, its share price is actually down about 10% over the last month, while gold is up about 9%.
Not for me
Given the risks, I don’t plan to buy gold mining stocks such as Pan African Resources for my portfolio any time soon. If I decide to allocate some capital to gold, I’ll most likely buy a gold ETF that gives me direct exposure to the spot price of the commodity.
This post was originally published on Motley Fool
