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Why I’d buy gold stocks for a looming recession

Gold bullion on a chart

It’s been well documented why it’s likely the UK will see a recession at the end of the year. Persistent inflation is causing a cost-of-living crisis as real income levels aren’t keeping pace. As an investor, I want to think about how to best protect myself. One area I’m considering at the moment is gold stocks. Here’s why.

The role of gold

As a precious metal, gold holds intrinsic value. That’s why in the past, other assets were backed by it via the gold standard. Unlike other financial assets, gold doesn’t pay out interest or offer me any yield. The reason why I’d hold the metal itself (rather than gold stocks) would be for pure price appreciation over time.

Over the past year, the gold price has fallen 3.9%. While it has lost ground over this period, it’s worth noting that some stock indices have performed even worse. For example, the Nasdaq 100 is down 19.5% in that time. The contrast in performance helps to illustrate the role of gold for an investor. During uncertain times, the price of the metal tends to appreciate.

People see gold as the ultimate safe haven as a store of value. So as a recession looms, I think that the gold price could gain further over the next year. Aside from buying physical gold, I can get exposure via the stock market as well.

Gold stocks that I like

As a disclaimer, it’s very hard to find a business with a share price that correlates exactly to the price of gold. If I just want to track the price, I can buy a gold ETF.

However, I don’t actually mind owning a gold mining company or similar resources firm. This is because I can diversify my exposure. Sure, the share price should move in the general direction of the underlying gold price. This is because the gold mined will be worth more or less to the business if the gold price is up or down.

Yet even if I’m wrong about the future direction of gold, a company can still be profitable due to the other metals that are mined. I should be able to limit my risk in this regard.

Centamin is a stock that I’m thinking about buying. It mines gold in Egypt. This is important, as it means it isn’t impacted by the Russia-UKraine war as it has no mines around Eastern Europe. In its latest report, its EBITDA margin was at a very healthy 40%. The share price has been flat over the past year, but I would have picked up dividends by holding the stock. The current dividend yield is 7.59%.

Another example I like at the moment is Fresnillo. The business is the second largest gold miner in Mexico and also one of the largest silver miners. Even though the share price is down 14% in the past year, I feel this is more due to cost inflation and global supply bottlenecks. This could still be a problem going forward, but if silver and gold prices lift, it should help to offset this.

I could be wrong about my view around gold. However, I think it’s smart to allocate a small portion of my free cash to it. Therefore, I’m strongly considering buying both stocks in coming weeks.

The post Why I’d buy gold stocks for a looming recession appeared first on The Motley Fool UK.

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Jon Smith has no position in any of the shares mentioned. The Motley Fool UK has recommended Fresnillo. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.