Asset Allocation 

Precious metals facing golden 2011

While the long gold rally certainly constitutes good news for precious metals miners, the relationship between that and share prices is less clear. Take Kazakhmys, for instance - its operations include productive gold assets but, relative to the size of its overall business, these aren't that significant. So a rising gold price won't necessarily mean a rising share price. That said, it's a somewhat different matter for dedicated precious metals miners - such as African Barrick Gold. Inevitably, operational variables at the company level need to be considered but, generally speaking, a booming gold price is more likely to be positive for such companies' share prices.

The market in physically-backed securities is primarily a western phenomenon, but it's also interesting to note that the strongest recent surge in overall demand came from Asian retail investors who have taken to hoarding gold bars. This segment of the gold market grew 42 per cent during 2010 and it now accounts for a surprising 12 per cent of total demand. Chinese retail investors are now allocating a much higher proportion of their funds to physical gold because there's a shortage of alternative investments. With local inflation on the rise, and with Chinese banks effectively offering negative real returns on savings, this Chinese focus on gold bars is at least understandable. In global terms, the issues surrounding currency instability and underlying inflationary pressures have not gone away, either. So gold's allure as a preserver of capital is likely to persist throughout this year.

Despite last year's gold rush, investors would have actually fared better with exposure to its sister metal - silver - in 2010. Dedicated silver miners Fresnillo and Hochschild Mining certainly attracted the attentions of investors last year, and their shares rose 111 per cent and 87 per cent respectively. The price of silver substantially outperformed that of gold last year, partially as a result of its increased use in industrial applications. That has has also unpinned a dramatic price rise for lesser-known precious metal, palladium. Fresnillo's share price benefited from repeat takeover speculation, too.

NAMEPRICE (p)MARKET CAP (£m)PE RATIOYIELD (%)1 YEAR PRICE CHANGE (%)LAST IC VIEW
AFRICAN BARRICK GOLD58223850
CENTAMIN EGYPT NPV (LON)1721861025.6
PETROPAVLOVSK1078202516.40.9-6.9
RANDGOLD RESOURCES51054646134.80.2-4.1
AQUARIUS PLATINUM (LON)331153035.81.2-25.7
FRESNILLO15781131754.81.088.0
LONMIN1910386527.20.01-8.6

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