Over the past year, a number of stocks in the FTSE 100 have doubled in price. These include Babcock, Rolls-Royce and St James’s Place. But leading the pack is Mexican precious metals miner Fresnillo (LSE: FRES).
Off the back of soaring gold prices, the stock’s climbed 155%. That means a £10,000 investment back then would be worth £25,400. But that’s not all.
Last year, it made record payouts in dividends totalling $0.743 per share. The 1,770 shares bought would have given an additional £950 in dividends.
Gold prices
In my opinion, the recent surge in gold prices comes down to a number of interconnected factors. Ultra-loose monetary policies, fiscal irresponsibility and uncontrollable public debt.
For far too long investors ignored gold as a safe haven and store of wealth, believing it to be a relic of a by-gone era. The last year’s taught us that nothing could be further from the truth.
Foreign central banks, most notably China and Russia, have been accumulating gold for a number of years. Recently however, following the election of Trump, the amount being repatriated from vaults in London and New York has exploded.
What’s even more stark is that these record purchases of gold were for actual delivery, not an equivalent paper contract where no gold is physically transferred. Earlier this year, the amount of gold being withdrawn from the London Bullion Market Association (LBMA) took the Bank of England completely by surprise. Contracts that are normally settled in a day were taking as long as eight weeks.
US participation
The big unknown is the extent to which the US is participating in this trend of central bank accumulation. Some argue that it’s been surreptitiously adding to its gold reserves.
What we do know is that US gold reserves as a percent of total global reserves have been in decline for decades. Back in the 1950s, the United States held more gold than the rest of the world combined. Today, they account for only about 20%, its lowest in a century.
US treasury secretary Scott Bessent has long held the view that the world’s entering a new era of global monetary realignment. Whether that will mean the return of a Bretton Woods gold standard, where dollars could be converted directly into gold, is doubtful. But I believe that the US will ultimately be forced to participate to a greater degree and bolster its reserves.
Shake out
The biggest short-term risk for Fresnillo stock is a major pullback. Indeed, I’m very much expecting one. Gold prices have already begun exhibiting some weakness over the past few weeks and are $200 off their highs.
Cost inflation for the miner remains elevated, and so too have contractor costs. However, even if gold prices were to come off another $500, it would still be raking in free cash flow. The all-in sustaining costs across its mines averages about $1,900.
There are some crazy estimates for gold prices out there. Whether true or not, only time will tell. But I don’t see this gold cycle coming to an end any time soon. I’m comfortable with the extent of my holding at the moment, but don’t rule out a further investment.
