The price of gold rose for the second day in the U.S. last night and appears to be finding solid support above the US$1,200 an ounce mark despite the firm market view that global interest rates are headed much higher over the short-to-medium term.
This is a bullish sign for gold as it indicates it will take more than higher interest rates to rob the precious metal of its investment luster. Interest rates are usually a key factor in determining the value of the commodity as gold is regarded as a store of value that pays no interest. When rates rise, investors typically prefer to buy into other asset classes that will generate a yield.
Hawkish comments from U.S. Federal Reserve bankers, and more recently, their counterparts in Canada and the United Kingdom are further reinforcing the view that interest rates in those major economies will be materially higher over the next year or so.
An interview with former Reserve Bank of Australia (RBA) board member, John Edwards, in the Australian Financial Review is also adding to speculation that the RBA will be forced to aggressively lift interest rates here as growth “normalises”.
The question for ASX investors is whether you should buy shares in the biggest and best known gold miners to ride this trend up?
Unfortunately, the investment case for gold stocks is not as clear.
Further, the value of these shares is impacted by factors unrelated to the price of the commodity. This means an operational issue can see the stock move contrary to the price of the yellow metal.
Buying a gold exchange traded fund (ETF) will give you a much stronger correlation to the commodity, but there is another stock you can buy that will give you a good exposure to the precious metal. The stock is laboratory testing services company ALS Ltd (ASX: ALQ).
Remember the saying that it’s the guy selling shovels during the gold rush that makes the money? ALS fits the bill as the company is the leader in providing analysis of drilling samples from the mining industry and could prove to be a less risky way to gain upside exposure to gold.
The stock may have enjoyed a good run but its profit growth momentum is likely to be sustained as most junior gold miners have completed capital raisings recently and are likely to be ramping up their exploration activities.
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Motley Fool contributor Brendon Lau has no position in any stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.
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