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Should You Buy Randgold Resources Limited, Fresnillo Plc And Centamin PLC As Gold Shines?

Gold prices received a much-needed boot up the backside in Friday trading, the precious metal benefitting from the Federal Reserve’s decision not to hike interest rates just yet.

The US central bank elected to keep the rate at a record low of 0.25% on Thursday evening, after Fed chair Janet Yellen advised that “the outlook abroad appears to have become less certain.” The move comes as little surprise, as the steady stream of sickly financial data from China shows little sign of letting up, a potential threat to economies across the globe.

Due to a subsequent weakening in the US dollar, gold hit peaks above $1,140 per ounce in end-of-week business, its highest level since the start of September. Because gold is traded in US dollars, any weakness in the greenback makes it cheaper to purchase.

With many analysts now touting December as the earliest point at which a benchmark hike can be expected, shares in London’s listed gold miners have also enjoyed a welcome boost.

Dedicated gold producers Randgold Resources (LSE: RRS) and Centamin (LSE: CEY) gained 3.6% and 4.9% respectively in Friday business, while silver colossus Fresnillo (LSE: FRES) advanced 3.4% from Thursday’s close.

Will the lustre fade again?

Even so, I do not believe investors should be rushing into the precious metal sector just yet, as a variety of headwinds could put paid to gold’s bounce.

It could be argued that gold’s traditional role as a ‘safe-haven’ asset — something held in times of macroeconomic and geopolitical instability — also boosted prices higher in Friday trade, the Fed’s lack of action reflecting the risks swirling around the global economy.

I no longer believe that this notion applies, however, as illustrated by gold’s steady decline in recent years. Even though fears of an economic ‘hard landing’ in China, not to mention concerns over a potential ‘Grexit’ in the eurozone have been doing the rounds for several years now, the gold price has bled 7% during the past year alone, and a whopping 41% since the record of $1,920 per ounce struck four autumns ago.

On top of this, a backcloth of low inflation across the globe also removes a key driver from the gold market, giving little incentive for investors to switch from fiat money into the world’s so-called ‘hard currency.’ With tough economic conditions in Asia also weighing on physical gold demand — a critical price-pusher in years gone by — I believe the gold market lacks the necessary fuel to build on Friday’s advance.

Profits under pressure

So what does this mean for Friday’s stock market risers? Well, Centamin suffered heavily during the April-June quarter as the gold price tanked, and pre-tax profit dipped by an alarming 34% in the period from the previous three months, to $18.8m.

The story was cheerier over at Randgold Resources, which announced in August that pre-tax profit had risen 15% in April-June, to $59.2m. However, this was thanks in large part to increased output — total production rose 7% to hit a quarterly record above 300,000 ounces in the period.

And Fresnillo announced last month that slumping gold and silver prices caused profit before tax to fall to $76.4m during the first six months of the year, down a whopping 44.3% from the corresponding period in 2014. This came despite silver and gold output advancing 10.6% and 37% respectively in the period.

Although these businesses continue to reduce costs to mitigate the impact of future price weakness across the precious metals suite, I believe that the prospect of further weakness could continue to weigh on these firms’ bottom lines. As a consequence, I reckon savvy investors should give London’s gold miners short shrift.

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Royston Wild 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.