Gold producers like FTSE 100-listed Randgold Resources (LSE: RRS) have been firmly on the defensive since early autumn, their share prices tracking the steady decline in gold values.
The yellow metal has eroded from 2017 peaks of around $1,350 per ounce set in September, prices coming under pressure as tensions between the US and North Korea have receded and expectations of extra monetary policy tightening by the Federal Reserve (and central banks further afield) have grown. Bullion was last dealing at around $1,240.
However, gold demand has not exactly fallen off a cliff as evidenced by latest World Gold Council data. This showed holdings in global gold-backed ETFs rose by 9.1 tonnes in November, taking the total to some 2,357 tonnes.
The continued demand for the safe-haven commodity does not come as a surprise to me given the reserves of political and economic intrigue still spooking markets.
Will President Trump continue to face legislative roadblocks? What will Robert Mueller’s investigation into Russian collusion mean for the future of the Trump administration? How will the White House respond to the next set of provocations from Pyongyang? And, across the Pond, when will the UK government get to grips with the Brexit conundrum?
And any of these issues have the potential to blast bullion values higher in the weeks and months to come.
They say that investors should always make room in their portfolios for gold, or at least exposure to gold-producing companies, as a hedge against so-called ‘doomsday scenarios’ that could batter the rest of their holdings.
In the current environment this sentiment is a wise strategy, in my opinion. And buying into metals mammoth Randgold Resources could prove a very wise move.
With City analysts predicting that gold values will remain strong, and Randgold steadily increasing output across its African mines, earnings at the business are anticipated to shoot 18% higher in 2017 and 24% higher in 2018.
A forward P/E ratio of 28.9 times may look expensive on paper, but I reckon the London company’s robust long-term profits outlook merits such a premium.
In deep water
I am afraid that my positive outlook for gold values does not extend to another go-to commodity in uncertain times — crude oil — given enduring questions over the enduring market imbalance.
Supply disruptions and the recent OPEC agreement to keep the taps turned down has propelled energy values skywards recently and just this week, Brent sprang to two-and-a-half-year highs above $65 per barrel following the closure of the Forties North Sea pipeline.
But with output from US shale producers heading steadily higher, and investment in the oil sector by other major producers like Canada and Brazil also increasing, my long-term view on crude values remains pretty pessimistic.
And as a result I will continue to give oilfield services play John Wood Group (LSE: WG), which reported today, short shrift. It advised on Wednesday that “our core oil & gas market continued to present challenges in 2017” and trading could very well remain tough as oil producers batten down the hatches in a bid to conserve cash.
City analysts are expecting earnings to fall 8% in 2017 and to recover 9% next year, but I believe the possibility of extended profits declines is extremely high. As a result I for one will be giving Wood Group a wide berth despite its cheap forward P/E multiple of 13.8 times.