These should be glory days forprecious metals, as China crashes, Syria burns, Japan stalls, Europe struggles and the US and UK run out of puff. Yet none of this has helpedthe goldprice, whichhas shedanother5% over the last year. Todays price of $1,140 an ounce is wellbelow 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 ofMexico-based gold and silver minerFresnillo (LSE: FRES)andRandgold 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 supposeddiversification 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 golds 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, whilemanagement is alerting investorsto the strength of ourbalance 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 boostthe relative attraction of cash,but it isenjoying a reprieve as the Federal Reserve loses its nerve. HSBC has helped byreiterating its buy guidance with a 810ptarget price that suggests a potential 16% uplift from todays 700p.It praises Fresnillo for itslow costs and high growth, and says theshare price should benefit from improved operational results, and higher gold and silver prices. With silver upnearly 11% in the last month and Fresnillos share price up 15% in the last week, it isstarting to shine again.
Randgold Resourcesboasts a strong balance sheet with no debt and $109m in cash, and asolid business model based on gold at $1,000 an ounce. Forecast earnings per share growth of 138% this year and 98% next make thisa good company operating in a tricky market. Whether you want to buy it at todays valuation of 140 times earnings is up to you. At least next year it should drop to 59times.
Randgold Resources has also got some of its shine back, rising 10% in the last week, helpedby dimming US rate hikeexpectations. 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.