In my opinion, a well-constructed portfolio should include some insurance against falling equity markets. Defensive investments including Telstra Corporation Ltd (ASX: TLS), Woolworths Limited (ASX: WOW) and government bonds provide some lower-risk protection.
Gold also may provide some measure of insurance against deflation, inflation and international conflicts. The latter is evident in the mini gold rally while US President Barack Obama continues to weigh up options on action to take in Iraq.
The future direction of the gold price is difficult to predict. To preserve capital it is preferable to invest in gold stocks that remain relatively steady during gold price declines. As the saying attributed to Henry Kissinger goes: "A diamond is a chunk of coal that is made good under pressure".
From April 10 to the end of last week, the gold price slid from US$1,320 to US$1,240. While the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) fell just 1%, the S&P/ASX All Ordinaries Gold Index plunged 10%. Sector heavyweight Newcrest Mining Limited (ASX: NCM) fell 9.6% and Regis Resources Limited (ASX: RRL) plunged 45%. The former has had a raft of problems and fears remain of a potential capital raising, while the latter had flooding at the Garden Well and Rosemont mines and failed to meet guidance for both production and costs.
The following two stocks have remained rock solid with the first rising 2.5% and the second unmoved. The success of the first is thanks to the outstanding 30% owned Tropicana gold mine of Independence Group NL (ASX: IGO). It is now viewed as a gold stock rather than a nickel-play. A net profit after tax (NPAT) of $20.6 million for the March quarter was up 200% and 65% on the March 2013 and December 2013 quarters respectively. After shedding an interim dividend of three cents per share, there are exciting prospects for increasing returns to shareholders in the near term.
Junior gold producer Beadell Resources Ltd's (ASX:BDR) main operation is at the Tucano mine in Brazil and it is the third highest gold mine by production in the country. Cash costs are forecast at US$535- $585 per ounce, placing it in the lowest quartile with sustainable gold production of around 200,000 ounces. Additionally, its high-grade open pit deposit has great prospects for extension. The local monetary policy also favours exporters by actually increasing the Beadall gold price by 3%, while the US gold price decreased by 5% in the year to 13 May, 2014. Debt, which was formerly considered a problem, is now forecast to be repaid in full by the end of the year and a sustainable dividend policy is in prospect.
What is the best investment?
In my opinion, both Independence Group and Beadall Resources are diamonds in the rough that represent good medium-to-long term investments for growth and the potential to increase dividends over time. However, there is one other stock that has a much greater dividend yield and tremendous growth prospects that has been nominated by our TOP Motley Fool analysts.
