Should you be buying or selling gold miners? People dived into gold during fears of a Trump presidency, and now that we're here, investors are still uncertain due to all the geopolitical tensions that have been cropping up recently.
Frankly I haven't got a clue where the price of gold is headed next. It will depend on supply and demand, as well as some other factors like the value of the Australian dollar against the US one. One thing I do know for certain is that I'm not buying Newcrest Mining Limited (ASX: NCM), Australia's largest gold miner. Here's why:
It is expensive
As I wrote in my half year coverage of the company's results, Newcrest looks pretty expensive at an estimated 35 times its full year earnings. This is for a company that grew production by 2% during the first half and saw its costs remain flat.
Not only is there no margin of safety to allow for changes in things outside the company's control (i.e., the price of gold), but investors appear to be paying well above a fair price for their business.
It has no control over the end price of its products
Supply and demand will affect the overall price of gold, as will the value of the Australian Dollar. Since Newcrest reports in US Dollars, its earnings become more valuable in our currency. However, investors have no way of predicting where the prices of gold or currency are headed next.
Gold will become less attractive as global interest rates rise
Often seen as a 'safe' asset to hedge against inflation and risk, gold will globally become less attractive as interest rates rise, especially the US Dollar. Investors like to own gold miners because they are seen as a proxy for gold, despite coming with all sorts of other company-specific risks such as debt.
The trouble is that the apparent virtues of gold become a whole lot less apparent as interest rates climb up from zero across the world. If you want an investment to sit there and do nothing, you can instead buy government bonds or even inflation-linked bonds from a government with a triple-A credit rating – like Australia. I think that there are better alternatives to both gold and Newcrest Mining available today.
