These should be glory days for precious metals, as China crashes, Syria burns, Japan stalls, Europe struggles and the US and UK run out of puff. Yet none of this has helped the gold price, which has shed another 5% over the last year. Today’s price of $1,140 an ounce is well below the glory days of August 2011, when it topped $1,900. Silver has struggled too, down more than 6% over the past year.
This is reflected in the drab share price performance of Mexico-based gold and silver miner Fresnillo (LSE: FRES) and Randgold Resources (LON: RRS), which mines for gold in west and central Africa.
All That Glisters
Over the last year, Fresnillo has fallen 8% and Randgold is up just 2.5%. That actually looks good compared to the other FTSE 100-listed mining stocks, whose share prices had been savaged by the collapsing price of industrial metals such as copper and iron ore. But it is still disappointing for those who invested in precious metals as a value store or for their supposed diversification qualities.
The long-term story is dismal. Over five years, gold and silver are down 14% and 29% respectively, while Fresnillo and Randgold are down 47% and 33%. Personally, I have always thought that gold’s “safe haven” status is arrant nonsense, given its history of volatility. It may have a handy role as a portfolio diversifier, but only if you understand exactly how risky it is.
Falling gold and silver prices have inevitably knocked profitability at Fresnillo, which suffered a half-year drop of nearly 35% to from $208m to $136m. Cutting costs and ramping up production has limited the damage, while management is alerting investors to “the strength of our balance sheet, the quality of our assets, the low cost nature of our operations, and the attractive returns generated on our growth projects“.
Fresnillo was bracing itself for rising US interest rates, as that would boost the relative attraction of cash, but it is enjoying a reprieve as the Federal Reserve loses its nerve. HSBC has helped by reiterating its “buy” guidance with a 810p target price that suggests a potential 16% uplift from today’s 700p. It praises Fresnillo for its low costs and high growth, and says the share price should benefit from improved operational results, and higher gold and silver prices. With silver up nearly 11% in the last month and Fresnillo’s share price up 15% in the last week, it is starting to shine again.
Randgold Resources boasts a strong balance sheet with no debt and $109m in cash, and a solid business model based on gold at $1,000 an ounce. Forecast earnings per share growth of 138% this year and 98% next make this a good company operating in a tricky market. Whether you want to buy it at today’s valuation of 140 times earnings is up to you. At least next year it should drop to 59 times.
Randgold Resources has also got some of its shine back, rising 10% in the last week, helped by dimming US rate hike expectations. If you expect gold and silver to make further gains, now could be the time to cross your palms with these two stocks.
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Harvey Jones has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.