A common strategy in the stock market when equities are down is investors flee to traditional safe havens like gold — but you should also consider gold mining stocks.
Investing in gold can go a couple of different ways. You can invest in physical gold, which is determined by the price per ounce of the metal, and you have to store it. Another way is to look at gold mining stocks. These are companies that specialize in producing gold.
Gold mining stocks are in the throes of their best stretches in nearly seven years as they’ve hit their highest prices since 2013.
If picking out specific gold mining companies to invest in seems a little daunting, take a look at the VanEck Vectors Gold Miners ETF (NYSE: GDX). It’s an exchange-traded fund that holds several gold mining stocks, and it is up 94% from a low set back in 2018.
New Money & Markets Chief Investment Strategist Adam O’Dell said it has the potential to go higher.
Where GDX Can Go
Money & Markets CIS Adam O’Dell.
O’Dell said one way to see the potential of GDX is to compare it to the S&P 500 SPDR ETF (NYSEARCA: SPY).
Even after the recent outperformance of GDX — from its March 13, 2020, close — GDX is up 78% vs just 12% from Gold SPDR (NYSEARCA: GLD) and 6.3% from SPY,” O’Dell, the Editor of Green Zone Stocks, wrote via email. “The GDX-to-SPY ratio is currently sitting at around 0.12.
“If that ratio simply reverts to the middle range of its historical chart — to, say, 0.36 — that means GDX outpaces SPY by 7-times ahead.”
Using that calculation, if SPY jumps 50% — to around $430 per share — GDX would gain around 360%, pushing it up to $155 per share.
And history suggests that is not outside the realm of possibility. O’Dell said to look at what happened with the two stocks in 2008 amid the Great Recession.
“GDX bottomed ahead of SPY in late October 2008 as Lehman Bros. was going down and everyone thought the world was ending,” O’Dell said. “Between then and September 2011, SPY gained 33%, GLD added 150% and GDX jumped 270% — eight times more than SPY.”
Banyan Hill Publishing Chartered Market Technician Michael Carr, author of Money & Markets’ informative “Chart of the Day” feature, thinks trading gold mining stocks could be the best way to play the precious metal. Click here to read Carr’s thoughts on BanyanHill.com.
Our Gold Mining Stocks Are Up
On the first suggestion that markets were starting to free fall, we published a story about three gold stocks you should buy right now.
The rationale was that investors were just starting to retreat from stocks on fears of the coronavirus pandemic. That made it a good time to examine solid gold stocks.
Instead of looking at ETFs, we turned our focus to more specific stocks, and they have not disappointed.
The first company we recommended was Franco Nevada Corp. (NYSE: FNV). It focuses on gold royalties and streams, not on mines. In the last five years, the Canadian company has returned 130.7% (including dividends paid).
To date, since we recommended it, Franco Nevada is up nearly 27% from the entrance price of $107.48.
The second company on the list was Barrick Gold Corp. (NYSE: GOLD), which is one of the largest producers of international gold. It has mines in North and South America.
A big reason we suggested Barrick Gold was because it owns half of the top 10 gold mines in the world.
If you jumped in when we recommended it, you would see a 42.6% total adjusted return, including its $0.07-per-share dividend.
Finally, we put Newmont Mining Corp. (NYSE: NEM) on the list because it produces gold, silver, copper, lead and zinc.
In the last year, Newmont’s earnings per share jumped 495% and its fourth-quarter growth was 10,200%.
We suggested it would keep growing, and it has. From the time we recommended Newmont, it has jumped nearly 42%.
For the three stocks, the average growth since we made our recommendation is 37% in gains.
The bottom line is that gold mining stocks remain a strong investment option. Whether you look at the VanEck Vectors Gold Miners ETF or at specific companies, there is a proven track record of gains.