FTSE 350 Precious Metals & Mining: Gold remains in vogue

Physical demand from India, the world’s second-largest gold buyer by volume, is also resurgent. Broad economic factors have certainly helped, such as the World Bank’s estimate for real GDP growth of 7.4 per cent in 2018, or the strong recent monsoon rains that are vital to the fortunes of millions of agricultural labourers. But the impediment to gold buying created by the demonetisation programme at the end of 2016 is now broadly subsiding.

Meanwhile, the gold price continues to benefit from a weakened greenback. Despite considerable volatility, the dollar-denominated spot price for gold climbed 13 per cent in 2017, which also happened to be the worst year for the US dollar since 2003, as measured against its rivals. Donald Trump, a keen believer in keeping US-produced goods price-competitive in global markets, apparently prefers it this way. Unfortunately for Mr Trump, he is not the Washington DC-based individual with his hands on the levers of monetary policy. That job falls to incoming Federal Reserve chairman Jerome Powell, who will be a key actor in the fate of gold and silver in 2018, as he signals the tone and speed with which interest rates are normalised.

Still, the US president is likely to provide support for the gold price, via his pre-dawn Twitter-based missives. As long as Mr Trump continually ignites the prospect of ground war on the Korean peninsula, a trade war with China, or threatens to fire special counsel Robert Mueller, refuge assets such as gold will find buyers.

Above anything, these factors will dictate the performance of the companies in this sector. Then again, mood music isn’t everything. As sudden rallies in precious metal prices have a habit of unwinding in short order, it is imperative that investors in gold and silver miners not lose sight of running costs, capital expenditure and earnings. And, as the chart above shows, things are moving in the right direction for our three favoured stocks in the sector. That compares with a less than convincing picture across the industry.

Indeed, Panmure Gordon’s analysis of 68 gold miners suggests that production growth from listed stocks will stay below 1 per cent until the end of the decade, as capital expenditure budget cuts that followed the 2013-16 gold bear markets are revealed.

Another key issue for precious metal equities in 2018 concerns resource nationalisation. Mindful of the disaster that befell Acacia Mining (ACA) (see box) last year, investors will be likely to view any substantial rise in prices with trepidation at a stand-off with mining ministries. Despite its strong track record of managing relationships with government stakeholders, Randgold Resources (RRS) could be tested by revisions to the Democratic Republic of Congo’s (DRC) mining code. London’s largest listed gold stock, which owns a 45 per cent holding in the DRC-based Kibali mine, has urged the country to apply mining rules more evenly rather than “taking more from fewer”. But, with Kibali accounting for around a fifth of Randgold’s net asset value, any deterioration in relations could spell bad news for shareholders.

Half a world away in Mexico, the possible July election of populist presidential candidate Andrés Manuel López Obrador has been cited by numerous analysts as a chief source of risk to markets. And, although it is unclear what threat this could pose to Fresnillo (FRES), last time Mr López Obrador ran for president in 2012, he promised to push foreign mining companies to pay higher taxes and wages.