Marshall Hargrave: Gold is one of the major proxies for fear.
No one likes global conflict, but when it’s on the rise, gold prices tend to increase. Investors flock to safety, and gold is considered the ultimate safe haven.
Global uncertainty does seem to be climbing. There’s the conflict in Ukraine, sanctions on Russia, the Israel-Gaza conflict, and the battle in Iraq, to name a few.
As billionaire investor Warren Buffett has famously said, “Gold is a way of going long on fear, and it has been a pretty good way of going long on fear from time to time.”
But what’s the best way to invest?
Over the last year, the SPDR Gold Trust ETF (NYSEARCA:GLD), which tracks the price of gold, is down 2%. In contrast, three top gold mining companies we’re discussing today have managed to outperform the commodity over this same time period.
Buffett has said, “Gold gets dug out of the ground in Africa, or someplace. Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head.”
However, with gold mining companies, you’re buying into actual companies with assets.
The gold mining business also has an economic moat; Buffett is a big fan of that concept. Basically, an economic moat is a competitive advantage.
Gold mining’s economic moat lies in the fact that it’s a very capital-intensive business. It takes large sums of money to explore and mine gold deposits.
Beyond the rise of global crises, the key for the major gold miners going forward is that the supply of gold might be in decline, which could help push prices for the commodity higher. The global mine production of gold only increased at an annual rate of 1% from 2003 to 2013.
With this, the major gold mining companies with established reserves and mines will be front and center when the time comes to increase output.
Here are the top three stocks to own as global uncertainty rises:
Gold Mining Stock No. 1: Randgold Resources (NASDAQ: GOLD)
Randgold explores for and mines gold in West and Central Africa. Being an Africa-focused miner, many investors are hesitant given the geopolitical risks. However, Randgold has been a perennial outperformer. Its stock price performance has managed to beat the SPDR Gold Trust ETF over the last three-, five- and 10-year periods.
The company has done a stellar job of generating industry-leading returns. Over the last five years, it’s managed to grow sales at an annualized 27%. Its profit margin is well above most miners at 26% (for the trailing 12 months).
The other beauty behind Randgold Resources is that it has virtually no debt. Its valuation is reasonable, with shares trading at a P/E (price-to-earnings) ratio of 18.2 based on next year’s earnings estimates.