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Why gold is my bet against a 2020 stock market crash

Manika Premsingh
Gold bullion on a chart

Gold prices have risen by over 21% in the last three months, which isn’t surprising at a time when there’s little clarity on how  the near future could look. The world economy is expected to end on a disappointing note in 2019 and while the outlook for 2020 is better, with persistent uncertainty on the trade deal between the US and China, the two biggest economies, there’s no way of knowing that it will indeed be an improved year.

It also mines gold

Stock markets can be closely correlated with larger economic conditions and in such a scenario, gold investments are a good bet. They’ve definitely held me in good stead as an investor during times of stock market slowdowns! There are plenty of ways to invest in gold, but if we have a preference for stocks, gold miners could be worth considering. Among the set of FTSE 100 companies, Antofagasta is one such. It’s a multi-commodity miner with exposure to gold. The only catch to investing in it in my view, however, is that gold forms a small part of its total revenues, with copper being the biggest contributor. In direct contrast to gold, copper tends to be sensitive to economic cycles, so even if there are gains due to gold next year, I think it’s quite likely that copper will be a downer. As a large, profit making company it can be an invested in for other reasons, but maybe not as a way of buying gold.

More gold here, but what about performance

Instead, I’d look at a pure gold miner like FTSE 250 company Centamin (LSE: CEY), whose financial performance might have been nothing to write home about in the past few years as it has seen both declining revenues and profits, but 2019 has been better by comparison so far. Its share price performance for the year can’t be ignored either. At the last close, the share price was up 27% from the same time last year as it has started picking up recently after a showing depressed performance starting from October onwards. Its dividend yield is around the average FTSE 100 yield of 4.5%, which means that as an investor looking to generate income, I’m no better or worse off than investing in an average company here.

The funds’ route

While CEY may well perform next year and remains a better bet than Antofagasta when investing in gold through the mining stocks’ route, I do think that other avenues can be explored too. One of them is exchange traded funds, which can invest in either gold mining companies or physical gold, if like me you think it’s too much of a bother to hold gold in physical form. I’d rather invest in physical gold ETFs because miners’ business challenges, like those of CEY, can affect performance, even if gold prices are rising. I’d invest in them now.

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Manika Premsingh has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.

Motley Fool UK 2019