Top broker says it isn't too late to go overweight on gold

Gold's proven to be a winning trade for many in 2019 but those who've missed out might be reluctant to jump in at a time when the market may have peaked.

| More on:
a woman

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Gold's proven to be a winning trade for many in 2019 but those who've missed out might be reluctant to jump in at a time when the market may have peaked.

The price of the commodity jumped by more than 20% over the past year in US dollar terms to US$1,567 an ounce. That's a little ahead of the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index.

But the gains for gold are even better in Australian dollars as the Aussie lost around 4% against the greenback over the same period.

Not too late to buy gold stocks

It's hard to find good value among gold equities on the ASX but those who have little to no exposure to the sector should consider buying select gold miners even if they don't look cheap.

The fact is, gold is unlikely to lose its lustre in 2020 and Credit Suisse echoed this bullish view as its recommending investors to go overweight on gold.

"Despite some near-term optimism on equities and economic conditions, we generally expect a risk-off skew in 2020 amid continued uncertainty on the US-China trade war, Brexit, and lingering fears of a global economic slowdown/recession," said Credit Suisse.

"This uncertainty is leading to most central banks around the world cutting rates, which is supportive of gold prices."

Negative rates a positive for gold

The broker sees more acute economic risks in Europe and Asia, but notes that the US Federal Reserve could quickly return to cutting interest rates if fundamentals weaken for the world's largest economy.

Low rates increase the attractiveness of gold, which doesn't generate a yield. Let's not forget that there around US$10 trillion worth of bonds that have a negative yield. This means investors are losing money by holding these securities and they are only doing so as these bonds provide a safe-haven from the ongoing market volatility.

Central bank buying

Gold arguably makes a better safe-haven investment in that regard and probably explains why central banks have been buying gold.

"Central banks have been net buyers of gold for 10 consecutive years, and Asian central banks still have very low gold holdings which could mean countries like China continue to switch treasury holdings into gold," said the broker.

"For gold, an increase to 20% of central bank reserves implies ~22kt additional demand (~5x 2018 demand)."

Picking the best gold stocks

A high gold price bodes well for gold stocks, although not all performed well. For instance, the St Barbara Ltd (ASX: SBM) share price shed around a third of its value over the past 12 months and the Regis Resources Limited (ASX: RRL) share price declined by around 3%.

In contrast, the Northern Star Resources Ltd (ASX: NST) share price and Newcrest Mining Limited (ASX: NCM) share price have surged close to 40% each over the period.

The trick to picking winners in 2020 is to focus on those that can generate strong free cash flow and have the ability to undertake a capital return in the near-term, according to Credit Suisse.

Motley Fool contributor Brendon Lau owns shares of Regis Resources Limited. Connect with him on Twitter @brenlau.

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.

More on Gold

rising gold share price represented by a green arrow on piles of gold block
Share Gainers

Guess which ASX gold stock just rocketed 92% on this 'outstanding' new discovery

Investor are snapping up the ASX gold stock as excitement over its gold and silver project surges.

Read more »

ETF written in yellow gold.

Should you buy ASX gold ETFs right now?

Is gold a 2024 fad or still a good long-term investment?

Read more »

rising gold share price represented by a green arrow on piles of gold block

Guess which ASX 200 gold stock is marching higher on a 'significant resource upgrade'

ASX 200 investors are bidding up the Aussie gold miner following a sizeable estimated resource increase.

Read more »

A man clenches his fists in excitement as gold coins fall from the sky.

2 under-the-radar ASX gold shares shining 11% brighter on Friday

These shares are having a golden finish to the week. But why?

Read more »

St Barbara share price Minder underground looks excited a he holds a nugget of gold he has discovered.

2 ASX gold shares making big news today (one up 300%!)

How is this ASX gold share up more than 300% right now?

Read more »

Calculator and gold bars on Australian dollars, symbolising dividends.

This ASX 200 gold stock can rise 30% and could be a takeover target

Bell Potter thinks investors should be snapping up this gold miner before it's too late.

Read more »

A woman's hair blows wildly as she sticks her head out the train window travelling through the desert.

Top ASX gold shares to buy in May 2024

Looking to add some investment exposure to the yellow metal this month?

Read more »

A man standing in a red rock mine is covered by a sheet of gold blowing in the wind.

Are Newmont shares at a stretched valuation right now?

Here's my take on the current Newmont share price.

Read more »