When the market gets a bit nuts, investors have always tended to shift towards gold. This could be part of the reason why the price of gold has risen higher and higher. How high? It recently hit all-time highs! And it is now at a price of about $2898 in Canada as of writing per troy ounce.
This rise has certainly been great news for gold stock investors. And it’s likely to continue in this market uncertainty. But how can you get into gold stocks, without the volatility? Let’s take a look.
What happened
To understand this, first we have to see why the price of gold has climbed in the first place. There are several factors. Recent economic data from the central bank and United States Federal Reserve have left many on edge as to when a cut in the interest rate will happen. Lower interest rates generally make gold more attractive to other investments such as bonds.
Further, the value of the United States dollar has been declining recently. This also makes gold, priced in dollars, cheaper for investors to buy using other currencies. This can push the price up even further.
Gold also offers a safe haven. The asset tends to hold its value or even increase during times of economic uncertainty or even geopolitical tension. All of these factors have been occurring lately, making gold even more attractive.
But should you buy gold stocks?
Just because gold is great, it doesn’t mean gold stocks necessarily do well. These are still mainly companies, which is why it might be a good idea to consider streaming companies instead.
Streaming gold stocks can offer lower operational risk, as well as predictable cash flow once they find mature mines. There’s also the potential for higher profit margins over streaming companies. Of course, there are downsides as well. These include limited upside potential and counterparty risk, as well as the reliance on miners’ performance.
However, this is far less risky than gold companies themselves. While they offer direct exposure to gold, greater upside potential and the potential of finding new mines, they’re also risky. They face all the risks associated with mining and consequently volatile earnings, and are hugely sensitive to market sentiment.
Consider WPM stock
If there’s one gold stock that I would consider right now, it’s Wheaton Precious Metals (TSX:WPM). WPM stock is a streaming company that will likely benefit from the rise in gold prices, but with less risk.
The company recently reported increased revenue, as higher gold prices mean higher revenue for the stock. What’s more, their contracts locked in a lower price for gold, so they essentially bought at a lower price, but are selling higher and pocketing the difference.
Third-quarter results showed a 16% increase in realized commodity prices, also contributing to revenue. And with improved profitability, the company has managed to improve its overall finances as well.
So while WPM stock may not turn into the next growth stock, it provides far more stability for investors than gold mining companies these days. And with a 1.4% dividend yield, you can look forward to some fixed income while you’re at it.
