Randgold's run could prove fool's gold

Let's get one thing clear from the start - we think that West Africa-focused gold miner Randgold Resources is a fine company with high-quality assets and experienced bosses who have proved themselves more than capable of delivering solid growth. In addition to its producing mines in Mali, Randgold has promising new projects and exploration in Cote d'Ivoire and Senegal, which are set to add to its net assets in due course. So why are we chalking up its shares as a sell? Simply put, our near-term view on the gold price is at odds with much of the City, where analysts are talking up another imminent break-out for the yellow metal from current levels around $850 per oz towards $1,000 due to the inflationary pressures stored up by the financial sector bailouts, which essentially amount to a mass devaluation of money by governments.

Indeed, what we found particularly noteworthy last autumn was that, despite the collapse of investment bank Lehman Brothers, and the consequent gumming up of the world's credit markets, which coincided with the traditional season of peak demand for gold jewellery, the price of gold still failed to establish a solid floor above $900 per oz. And, if the price does not do what it's supposed to do in the midst of something close to financial armageddon, when is it going to? We have sympathy with the view that the dollar's long-term trend is only down - and that could put a spring in the gold price again - but in the real world the past few months have shown that punters still see greenbacks as a safe haven more solid than gold, as witnessed by the dollar's current strength.

The dollar is also likely to retain its strength in the coming year, as many analysts believe that the US will be the first developed economy to emerge from recession and, meanwhile, other major currencies are depressed by ballooning governmental deficits. Moreover, despite the unprecedented amount of liquidity being poured into global capital markets, in the near term it is deflation rather than inflation that seems the real threat, as asset prices continue to slide and demand continues to atrophy. We believe 2009 will turn out to be dogged by falling asset prices and a strong dollar, and we cannot see how gold will thrive in such an environment.

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Meanwhile, Randgold's shares continue to hover near their all-time high - in other words, they are as expensively rated as they have ever been. And the share price is especially sensitive to the gold price, even for a gold producing company. Stockbroker Arbuthnot calculates the percentage change relationship between the two at 0.93, almost one-for-one, over the past five years. Great when the gold price is climbing, but bad when it is declining.

The market's focus on the shares has been stimulated by their recent promotion into the FTSE 100 index and the relegation of fellow precious metal producers Fresnillo (silver) and Lonmin (platinum). This means that Randgold has an increased following as the only pure precious metals play in the Footsie. But this interest has also forced Randgold's share rating higher than shares in other gold miners, and that may leave the shares vulnerable should the hype over gold prove unwarranted.

Meanwhile Randgold's operational development is entering a particularly difficult period. Given the uncertainty over global commodity prices - not just of gold but also of oil, which is a major cost to the group - the company announced a change of plan with its third-quarter results in November. It is postponing the construction of a new mine in Mali by a year, but sticking to previous production guidance and hoping that increased extraction at an existing mine will make up the difference. That may prove to be the case. However, Randgold's bosses acknowledge that they have set a 'challenging' target, and sentiment may sour if production falls short of plan.