…[I have] created a model that will predict the price of gold for a year from now and the results suggest that there will not be much of an increase. [As such,] the best way to play this…[sector] is to find companies with solid financials, a history of turning a profit margin even during tough times…[and] outperform the gold index over a long period of time. These are the ones to consider.
Predicting A Future Price For Gold
I hate making predictions based on guesses. No one really knows what will happen in the next year. A year ago, who would have predicted Brexit or the rise of Donald Trump? I would suggest very few of us; yet, those uncertainties have now entered the thinking of many investors who are now guessing what will happen to investment markets. Having said that…[my] model (see here) indicates the price of gold in one year will be $1,389.32/oz. (±190.20). This means there is an 80.3% chance that gold will appreciate over the next 12 months for an average increase of 2.8%.
Options For Investing In Gold
A 2.8% return on investment is simply not worth the risk. While the temptation is there to invest in gold as a hedge against all worldly fears, that philosophy does not apply here. There is a 16% chance gold could climb to $1,580/oz., however, that is the same likelihood of gold falling to $1,200/oz. The best way to play this industry is to find companies with solid financials, and have a history of turning a profit margin, even during tough times. Additionally, it is important to find companies that outperform the gold index over a long period of time. These are the ones to consider:
|Ticker||Name||Market Cap||Altman Z-Score||Average Net Margins||Growth Last Ten Years|
|GOLD||Randgold Resources Ltd.||Large||25.72||28.12%||444.01%|
|GORO||Gold Resource Corp.||Small||19.03||19.49%||643.89%|
|RGLD||Royal Gold, Inc.||Mid||4.43||13.95%||212.57%|
|SPDR Gold Trust ETF (NYSEARCA:GLD)||117.03%|
All of these companies have safe financials that are under control.
- They also show they can generate a profit of at least 10% per year, and have outperformed the actual metal over the last 10 years.
- For the two miners, Randgold and Gold Resource, they both keep their costs per ounce well less than $1,000/oz., which will keep their profit margins very healthy in the leanest of times.
- While Franco-Nevada and Royal Gold do have a heavy presence in the gold market with their streaming rights, they are also diversified in other commodity sectors, such as silver and copper, so their margins are not solely dependent on gold.
As my thesis indicates, I do not anticipate much increase in the price of gold over the next 12 months. However, it is still a good idea to invest in gold companies, not because their industry is in gold, but because they are good solid companies. I firmly believe one should allocate 5% of their holdings in precious metals or related companies as a hedging strategy against the uncertainties that exist in the market. This article has identified 4 companies that are worth considering, and should be part of one’s allocation.
Disclosure: The above article has been edited ([ ]) and abridged (…) by the editorial team at munKNEE.com (Your Key to Making Money!) to provide a fast and easy read.
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