Industrial demand for gold, and especially for silver, always rises when economic conditions improve. At the same time investor interest tends to fall as confidence rises. But during this particular upturn I don’t think safe-haven precious metals interest will wane. This is because inflation is rising at a fast pace right now. It could continue rising too as, in my opinion, central banks are likely to keep interest rates locked around current lows.
Precious metals going for gold again?
A survey conducted by investment manager China Post Global and NTree International underlines the positive sentiment towards precious metals that many market makers have in 2021. The report quizzed 150 institutional investors and wealth managers in Europe over the investment outlook for a range of commodities.
Firstly, more than two-thirds (67%) of respondents said they expected the level of allocation into commodities to rise in 2021. And when asked about the outlook for individual commodities, gold came out on top, with 73% of those quizzed taking a positive stance. Silver came in fourth on the list with a reading of 49%, beaten only by natural gas and crude oil.
But I have to remember that commodity prices are attuned to a number of factors and can be highly volatile. Gold, for example, plunged by more than $300 within three months of hitting record highs around $2,070 per ounce last summer. Bullion prices have struggled for traction since then as bond yields have risen and safe-haven demand for Bitcoin has increased. These two issues could create headwinds further down the line, too.
Buying for the new bull market
That said, I’m still confident that gold and silver prices could spring higher again, helped also by a likely steady weakening of the US dollar. Precious metals are valued in bucks, and so they effectively become ‘cheaper’ to buy when the North American currency recedes.
And this is where buying Fresnillo shares for the new bull market comes in. Investors like me can get exposure to gold and silver in a variety of ways. One is to buy bars and coins and to put it in a safe, for example. I can also invest in an exchange-traded fund (or ETF) that tracks the price of precious metals.
However, if I take this option, I don’t enjoy one of the things that makes share investing so attractive: the receipt of dividends. And Fresnillo offers inflation-beating yields 2.9% and 3.4% for 2021 and 2022 respectively.
The business of pulling raw materials out of the ground is fraught with risk that can damage future earnings. But at the moment, City analysts think Fresnillo will enjoy earnings rises of 69% and 18% this year and next. Consequently the miner trades on a bargain-basement price-to-earnings growth (PEG) ratio of 0.3. All things considered I think this FTSE 100 firm is a great UK share for me to buy for the new bull market.
Royston Wild has no position in any of the shares mentioned. The Motley Fool UK has recommended Fresnillo. 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.