Gold has long been hailed as a safe haven in economic downturns. Seen as a store of value, gold can be used as a hedge against uncertainty and tool for preserving wealth. When the threat of recession looms, proxies for physical gold such as gold miners and gold ETFs can appeal.
Over the past year global growth has fallen, and is predicted by the IMF to slow to 3% in 2019, its lowest level since 2008-09. Ratings agency Fitch has predicted even slower world economic growth of 2.5% in 2020. Australia too has been caught in the global downturn, recording its slowest rate of economic growth for a decade in the September of quarter with annualised growth of a weak 1.4%.
The Reserve Bank of Australia (RBA) has cut interest rates to record lows while state and federal governments increase spending to revive the flagging economy. Yet the impact appears to be muted; consumer and business confidence remain well below long term averages. In September, the index of business confidence fell to 0 from 1 and has been below the long-term average of 6 all year except for June.
The prospect of recession has the potential to be self-fulfilling; as consumers reduce spending in anticipation of a recession, so the drop in spending can actually precipitate recession. Investors tend to flee to safe haven assets such as bonds, cash, and gold. Like any commodity, the value of gold fluctuates over time, but it is seen as a defensive asset due to its relative scarcity.
Gold can be used to provide diversification benefits relative to stocks. Over time, returns on gold have proven to have a low correlation to the returns on equities. Gold can therefore be used to weather periods of market volatility. Gold can act as a hedge against inflation, and a safe haven in periods of political or economic uncertainty.
Gold prices have increased nearly 18% in 2019, from US$1,282 per ounce to US$1512 per ounce. The problem with investing in physical gold, however, is storing it. Proper arrangements must be made to ensure gold is not lost or stolen given its physical value. Thankfully for investors, exposure to gold can be gained without the hassle of holding physical gold via shares in gold miners or gold ETFs.
Newcrest Mining Limited (ASX: NCM)
The Newcrest share price is up over 40% this year, trading at over $32 after having started the year at $21.71. The largest gold producer on the ASX, and one of the largest gold mining companies in the world, Newcrest is currently trading on a price-to-earnings (P/E) ratio of ~30. Newcrest operates both gold and copper mines and mined 2.5 million ounces of gold and 106,000 tons of copper in FY19.
Revenue for FY19 was up 5% to US$3,742 million, with earnings before interest, tax, depreciation and amortisation (EBITDA) up 7% to US$1,670 million. Underlying profit was up 22% to US$561 million. Net debt was decreased by 62% to US$395 million over the FY19 financial year. Dividends increased for the third consecutive year, up by 19% for a full year dividend of $US22 cents per share.
Newcrest’s all-in sustaining costs of production (AISC) were a record low of US$738 an ounce in FY19. AISC costs increased to US$899 in the September quarter due to several major planned maintenance shutdowns. For the same reason, gold production was down 23% from the June quarter while copper production was down 14%.
Improvement is expected in coming quarters and full year guidance remains unchanged. The realised gold price was up to US$1,436 per ounce for the September quarter compared to US$1,309 for the June quarter, and US$1,269 for FY19.
St Barbara Ltd (ASX: SBM)
The St Barbara share price is down nearly 40% this year, trading at ~$2.80 from $4.51 at the start of the year. The gold miner has 3 mining operations in Western Australia, Papua New Guinea, and Canada. Gold production in FY19 was 362,346 ounces, down from 403,089 ounces in FY18. All-in sustaining costs were $1,080 an ounce.
Lower production volumes were recovered from St Barbara’s Gwalia mine in Western Australia due to activities to extend the mine and improve ventilation limiting parallel work. EBITDA was $274.8 million down from $345.5 million in FY18, and underlying NPAT was $141.7 million, down from $201.9 million.
Cash in the bank at the end of FY19 was $110 million while the company has an undrawn $200 million debt facility.
St Barbara paid a dividend of 8 cents in FY19 and has a dividend yield of ~2.8%. Gold production for the company’s Gwalia mine is expected to be between 175,000 and 190,000 ounces in FY20, with all-in sustaining costs estimated at between $1,390 and $1,450 an ounce.
In July, St Barbara completed the acquisition of Atlantic Gold Corporation, a Canadian low-cost gold producer listed on the Toronto Stock Exchange. The AU$780 million purchase price was funded through a $490 million pro rata accelerated non-renounceable entitlement offer and existing cash reserves. The acquisition diversified St Barbara’s production base with the addition of a sustainable long life operation in a favourable jurisdiction.
ASX gold ETFs
If you prefer exposure to a basket of gold miners, the VanEck Vectors Gold Miners Exchange Traded Fund (ASX: GDX) provides exposure to a portfolio of global companies involved in the gold mining industry. Designed to replicate the performance of the NYSE Arca Gold Miners Index (before fees and expenses), the fund has provided returns of 10.23% per annum for the 5 years ended 30 September.
Management fees are 0.53% per annum and the fund held 45 securities as at 30 September. Top holdings included Newmont Goldcorp Corp (listed on the NYSE and Toronto Stock Exchange), Barrick Gold Corp (listed on the NYSE and Toronto Stock Exchange), Newcrest Mining Limited, and Franco-Nevada Corp (listed on the NYSE and Toronto Stock Exchange).
For exposure to physical gold, the Betashares Gold Bullion ETF – Currency Hedged (ASX: QAU) is backed by physical gold bullion held in a London vault. The fund hedges its US dollar exposure to allow for a transparent exposure to the price of gold.
Betashares discloses the actual gold holdings backing the fund and value of the funds assets daily on the fund website. Units can be bought and sold on the ASX like any share, providing for far greater liquidity than physical gold. Management costs are 0.59% per annum.
Investors have several options when it comes to accessing the diversification benefits of gold. Shares in gold mining companies offer indirect access to the price of the precious metal, while ETFs can provide a direct correlation to gold spot prices. Either way, there is no need to hit the goldfields – the benefits of gold can be added to your portfolio with just a few clicks.
If you're not sold on gold, don't miss The Motley Fool's top 3 dividend picks for 2020 instead.
When Edward Vesely -- our resident dividend expert -- has a stock tip, it can pay to listen. With huge winners like Dicker Data (up 147%) and Collins Food (up 105%) under his belt, Edward is building an enviable following amongst investors that are planning for retirement.
In a brand new report, Edward has just revealed what he believes are the 3 best dividend stocks for income-hungry investors to buy now. All 3 stocks are paying growing fully franked dividends giving you the opportunity to combine capital appreciation with attractive dividend yields.
Best of all, Edward’s “Top 3 Dividend Shares To Buy For 2020” report is totally free to all Motley Fool readers.
Motley Fool contributor Kate O'Brien has no position in any of the 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 Scott Phillips.