5% dividend yield! A penny stock I’d buy as inflation rockets

I still believe buying UK gold-producing shares is a sound idea as inflation rises. Demand for safe-havens like bullion tends to soar when concerns over the value of paper currencies increase. I’d take the plunge by buying into penny stock Centamin (LSE: CEY).

Yesterday, data from the UK showed consumer price inflation (CPI) rose at its fastest rate for 30 years in December. A reading of 5.4% also topped broker forecasts (again). Today, figures from the eurozone confirmed that CPI rose by record levels last month. And last week, the US announced CPI grew at its fastest rate since 1982 in December at an eye-watering 7%.

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The inflationary surge could be set to worsen still further, pushing gold prices higher in the process. Energy prices continue to climb and Brent Crude, for instance — which just climbed to seven-year peaks of around $90 per barrel – is being tipped to barge through $100 within months.

Oil and gold have an historic relationship of moving higher and lower in lockstep. Supply chain problems could keep driving the prices of other everyday products and services travelling upwards as well.

The central bank threat

Gold values have just struck two-month highs above $1,840 per ounce because of these rising inflationary strains. And, accordingly, Centamin’s share price has risen to its most expensive since early December, to around 95p per share.

Look, there’s no guarantee that gold prices will continue heading northwards. Major central banks have already begun to hike rates to curb runaway inflation, and a continuation on this path could stifle further gains for gold.

Fresh action by the Federal Reserve would likely create a double whammy for gold too as it would help the US dollar gain value. A rising greenback essentially makes it less cost effective to buy assets that are predominantly sold in dollars like gold.

Speculation is growing however, that central banks are failing to do enough to tackle the inflationary surge. Their ability to tighten policy in the future could be restricted too if economic conditions are weak. A flare-up of the Covid-19 crisis, fresh trade wars, or a Chinese property market crash are just a few of the threats to the global economy.

Why I’d buy penny stock Centamin

There are plenty of gold-producing UK shares for me to choose from today. But I like Centamin because of its impressive production outlook and its ambitious growth plans. Trading news today showed output soar 58% in the final quarter of 2022. The penny stock is taking steps to eventually produce 500,000 ounces of the yellow stuff each year.

I also like Centamin’s impressive value. I think a forward P/E ratio of 14 times is undemanding, given what I consider to be the company’s bright profits outlook. Its 5% dividend yield meanwhile, makes mincemeat of the broader FTSE 100 average of below 2%.

There are many UK stocks I’m considering buying to protect myself from surging inflation. But I think Centamin could possibly be one of the best.

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Royston Wild 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.