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.

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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.

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