Precious metals prices have been in retreat over the past 12 months, but there are reasons to suggest that the FTSE 350 producers could fare better in 2016 than the wider mining complex, although markets are likely to remain volatile throughout the period
At the start of 2016, both gold and silver prices were buoyed by increased geopolitical anxieties that prompted a step up in safe-haven buying by Asian dealers. Precious metals markets hit a positive note as mounting concerns over the Chinese economy sent prices for energy, equities and industrial inputs into a tailspin. Dealers would have taken account of worsening relations between Saudi Arabia and Iran, together with the apparent detonation of North Korea's first hydrogen bomb.
However, it's perhaps paradoxical that while a deteriorating global security outlook provides a potential spur for gold prices, it also serves to support the US dollar, which demonstrates an inverse correlation to the yellow metal. The price dynamic also reverses when insecurity gives way to stagnation; global economic weakness has resulted in continued fears of deflation, but in a deflationary environment the prices of all assets move lower.
It's interesting to note that while physical demand for gold remains strong across the globe, it has not helped to boost prices. This feeds into conjecture that the proliferation of derivative products, many of which are backed by physical bullion - at least nominally - is undermining precious metals prices, although contract volumes have pulled back substantially since the sell-off in the early part of 2013.
Moving into 2016, we find the gold/silver ratio implies that either silver is too cheap or gold is too expensive on an historical basis. The gold price continues to be roughly in line with the average all-in cost of production, although it's conceivable that that could dip below $1,000 an ounce - upcoming figures from the FTSE 350 miners will provide a pointer on that front. Over the long haul, precious metals prices could find support through the legacy effects of central banks' monetary policy, but it's still impossible to quantify the likely impact.
| NAME | Price (p) | Market cap (£m) | PE (x) | DY (%) | 1-year change (%) | Last IC View |
| ACACIA MINING | 162 | 666 | 20.9 | 1.7 | -46.8 | Hold, 236p, 27 Jul 2015 |
| CENTAMIN | 64 | 733 | 9.0 | 3.0 | -7.1 | Hold, 74p, 15 Aug 2014 |
| FRESNILLO | 665 | 4,897 | 235.6 | 0.5 | -24.1 | Buy, 633p, 04 Aug 2015 |
| POLYMETAL INTERNATIONAL | 528 | 2,242 | 11.0 | 2.5 | -10.5 | Sell, 574p, 29 Oct 2015 |
| RANDGOLD RESOURCES | 4,268 | 3,979 | 26.7 | 0.9 | -21.3 | Buy, 4,326p, 22 Jan 2016 |
Favourites
Fresnillo's (FRES) ability to generate strong free cash flow in the face of a weakened price environment explains why the Mexican precious metals miner remains one of our preferred investment options within the sector. A free cash flow yield of 3.3 per cent is forecast for the current year even with the capital draw linked to the new San Julian mine. We should also witness a substantial uplift in net earnings.
Outsiders
Centamin (CEY) declared a maiden dividend at its June half-year, marking it as one of the small group of London-listed gold miners that actually return cash to shareholders. We're broadly positive on the Egypt-focused stock, particularly given the solidity of its balance sheet, but we will review our stance once it becomes apparent that recent upgrades to mine infrastructure have improved grades.
