The Newcrest Mining Limited (ASX: NCM) share price is trading close to its 12-month high. Will the share price continue its surge in the coming months?
Newcrest engages in the exploration and mining of gold. It is Australia’s leading gold mining company with its most prominent Australian mines being located in the Pilbara region of Western Australia and just south of Orange in rural New South Wales. The company also operates a number of mines outside of Australia including in Papua New Guinea, Indonesia and Ivory Coast.
The Case For Gold
Besides being something treasured for its beauty, gold has for centuries been considered a reliable store of value. Gold’s worth doesn’t rely on the full backing of any government or institution which cannot be said for any of the world’s paper currencies.
There is a commonly held belief that gold performs well in times when growth assets such as shares perform poorly and underperforms during times when growth assets are doing well. As a result, gold is often seen as a good way to diversify your portfolio and hedge against major downturns in the market.
A common criticism of gold as an investment is that unlike property or shares, it produces absolutely zero income to the holder. In many cases it simply sits there looking pretty. Gold has very limited practical purposes and historically, it has given investors a low return on investment. Whilst these points are all true, they hint at a failure to understand the true value of an investment in gold. Most importantly, gold serves as a hedge against a collapsing economy.
Due to the rarity of such events, people tend to discount their importance but choosing to ignore something doesn’t mean it’s not there. Whilst we can’t rely on ourselves to accurately predict future market shocks, we can take actions to hedge against such risks.
Instead of buying physical gold and dealing with the problem of storing it, another option is to buy gold mining companies listed on the ASX. When the price of gold is rising, the share price of gold miners are likely to do the same.
The Highest Quality Gold Miner On The ASX
Newcrest has a massive advantage in being one of the lowest cost producers of gold with a cost base of approximately $835 per ounce. This means that all else being equal, Newcrest makes a higher profit per ounce sold than its competitors. The company is conservatively funded with low levels of debt and operates some well-established mines that are highly profitable at the current gold price. For the 2019 financial year (FY19), I am expecting Newcrest to deliver a huge profit in the range of $800 million to $900 million. It is for the aforementioned reasons that I view Newcrest as the highest quality gold miner listed on the ASX.
Is It A Buy Right Now?
The share price has had a tremendous run and is up more than 50% since last August. As a result, much of the good news is already factored into the current share price. For those interested in buying, I’d suggest waiting patiently for a pullback in the share price in the order of 10-20% before getting in.
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Disclosure: At the time of publishing, Luke does not have a financial interest in any of the companies mentioned.