The performance of the FTSE 100 in recent weeks suggests that investors are becoming increasingly nervous about the prospects for the world economy. This is not particularly surprising, given that there are ongoing threats from the introduction of tariffs, rising US interest rates and concerns about debt levels.
Given the potential for further volatility in share prices in the UK and across the globe, gold miners could become increasingly popular. Their shares have generally performed well in recent weeks, and further growth could be ahead if investor sentiment remains weak.
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According to the IMF, the world economy faces a number of risks at the moment. Chief among them is the trend towards increasingly protectionist trade policies which are being implemented by the US, China and various other countries across the globe. While investors had previously seemed to take such measures in their stride, they could now lead to a more uncertain period for the FTSE 100.
Alongside this, the strength of the US economy is also causing concern among investors. It grew at an annualised rate of 4.2% in the second quarter of the year. The Federal Reserve is expected to respond by continuing to raise interest rates. The fear among investors is that rising interest rates will cause debt servicing issues not only in the US, but also across the emerging world. Given that debt levels have increased significantly in recent years due to a loose monetary policy, higher interest costs could have a significant impact on the prospects for the world economy.
While the FTSE 100 has declined by around 7% in the last two weeks, the price of gold has risen by over 3%. Although the prospect of higher interest rates would normally make gold less attractive to investors as a result of its lack of income prospects, the uncertainty regarding tariffs could lead to an improved period for the precious metal. Its track record of being viewed as a defensive asset and a store of wealth may lead to higher demand among investors should heightened stock market volatility continue.
Two gold miners which appear to offer fair valuations despite recent share price rises are Polymetal (LON:POLY) and Centamin (LON:CEY). They trade on forward P/E ratios of around 10 and 15 respectively.
Polymetal is a gold and silver producer which operates in Russia, Kazakhstan and Armenia. It is forecast to grow earnings by 30% in the next financial year. Centamin operates in Egypt, and has experienced a challenging 2018 which has included two cuts to its production guidance. However, earnings are forecast to grow by 20% next year, while it yields over 5% versus a 5.7% yield for Polymetal.
Clearly, gold miners can themselves be highly volatile at times. Should the world economy continue to perform well, investor interest in precious metals could moderate. But, given the risks from further tariffs, holding gold miners within a diversified portfolio of shares could be a sensible idea.
* Robert Stephens owns shares in Centamin.