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Gold is perhaps one of the best-performing assets this year. There are many reasons why the “yellow metal” is doing well, but in my opinion, it boils down to uncertainty and falling bond yields.
Economic recovery is a big uncertainty. On the one hand, there are signs of recovery on the supply side (i.e., industrial production, and capital investment) yet there are no concrete data to support a recovery in demand (i.e., retail sales, and transportation).
Why buy gold?
Some people do not favour gold as an investment because it doesn’t generate any income. This is possibly less important today given the US Government 10-year Treasury yields just north of 0.5%.
It’s not hard to understand that the gold price is positively correlated with the inverse of the real interest rate.
For readers not familiar with the real interest rate, let me borrow the definition from Investopedia:
A real interest rate is an interest rate that has been adjusted to remove the effects of inflation to reflect the real cost of funds to borrower and the real yield to the lender or to an investor.
With the Federal Reserve doing “whatever it takes” to support the economy, some may argue that inflation returning is only a matter of time. That will benefit gold.
How to capture the trend?
The purest form is to buy physical gold or a gold ETF. This is the most straightforward approach. However, gold stocks are also a good way to play it. Here’s one Chinese gold stock that investors can buy.
Shandong Gold Mining
According to the company’s description, Shandong Gold Mining Co Ltd (SEHK: 1787) operates a gold mining and production business. The company provides gold exploration, processing, and outsourcing gold smelting services.
Shandong Gold Mining is one of the top gold producers in China and also among the top producers globally.
In 2019, its gold mine production volume was 40.12 tonnes, with revenue of RMB 62.6 billion (US$8.9 billion), gross profit of RMB 5 billion, and basic earnings per share of RMB 0.42.
Shandong Gold’s share price and the price of gold are positively correlated. This is exactly to the point on why some may want to bet on gold stocks as a leverage play on the price of gold itself.
Foolish bottom line
Gold returned roughly 27% so far in 2020 but shares of Shandong Gold Mining have returned a whopping 75%. That said, it is important and worth nothing that leverage works both ways.
That means that the potential downside for Shandong Gold’s stock is likely to exceed the fall in the gold
A hot stock in China F&B Market you don’t want to miss
Buying HSBC for retirement savings is out-of-date now, this dividend growth stock could be more appropriate. With China transiting towards a domestically focused economy, the expanding middle class has driven a skyrocketing growth in the domestic food market. We see a Hong Kong stock with ultimate potential underlies the economic explosion which you don’t want to miss.
The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Hong Kong contributor Lonnie Yen doesn’t own shares in any companies mentioned.