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Robert Stephens, CFA, discusses why gold miners could offer investment potential in the current climate.
The FTSE 100 has experienced one of its fastest-ever declines in the first quarter of 2020. However, the gold price has recorded a modest rise of around 6% over the same time period. Investors have been attracted to gold’s defensive credentials, while an exceptionally accommodative US monetary policy may help to sustain gold’s recent price rise.
Buying shares in gold miners could, therefore, provide diversification and lower correlation within a portfolio. Though there is limited choice for investors in the FTSE 350, and volatility may continue to be high, mid and large-cap gold miners could offer good value for money over the long term in my opinion.
Gold has historically been highly demanded by investors during periods of economic uncertainty. Its capacity to act as a store of value becomes increasingly desirable while assets such as stocks and property experience price declines.
Should the outbreak of Covid-19 (C19) continue to increase in scale and drive greater government and central bank intervention, investors may bid up the price of gold so that it moves even closer to its all-time high.
Another key catalyst for the gold price over the medium term could prove to be the Federal Reserve’s recent response to the C19 outbreak. It has dropped interest rates to zero, which makes gold more attractive versus interest-producing assets.
In addition, a lower US interest rate could make gold more affordable for the majority of global buyers through weakening the dollar. This may further increase demand for the precious metal.
The FTSE 350 contains relatively few gold miners. Among them is FTSE 100-listed Polymetal (LON:POLY), which operates in Russia and Kazakhstan. It has nine operating mines, and expects to ramp-up production over the next few years as its new mines come onstream.
Polymetal’s price-earnings ratio of 13 indicates that it offers good value for money. Its all-in sustaining cash cost (AISC) of $866 per ounce highlights its profit potential while gold is trading at an elevated level.
FTSE 250-listed Centamin (LON:CEY) operates principally from a single site in Egypt. It has a net cash position of $349 million, while its AISC of $943 per ounce indicates that it is likely to be highly profitable over the medium term.
It expects to increase gold production to between 510,000 and 540,000 ounces this year, which would represent a 6-12% increase on last year’s production level. According to the company’s investor update this week, it has so far suffered no disruption from C19. Its forward price-earnings ratio of 13 could prove to be attractive.
FTSE 100-listed Fresnillo (LON:FRES) is the world’s largest silver producer, but is also Mexico’s largest gold miner. It has experienced production challenges in the past couple of years. However, it is investing in maximising the production of its existing assets. It expects this to stabilise its production in 2020, and to grow its production in 2021.
Fresnillo’s 12% share price decline over the past year suggests that investors are unsure about its near-term prospects. This could make it a relatively volatile stock, but one that offers long-term upside potential.