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Take advantage of the crash in precious metals prices

By Gary Newman | Sunday 13 November 2016

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from ShareProphets). I have no business relationship with any company whose stock is mentioned in this article.

It was a real rollercoaster ride for precious metals and shares last week, following the results of the US elections and a surprise win for Donald Trump, but this could present some great buying opportunities.

Gold was expected to surge if Trump won, but after a quick spike to around the 1330 area, it has been falling steadily ever since, really picking up the pace on Friday when it dropped around 3% in a single session, ending the week at $1,227/oz, roughly 7.5% lower than the post-election highs.

It was a similar story for silver, which hit a high of nearly $19/oz, yet ended the week all the way down at $17.37/oz, a fall of over 8% from its peak just a few days earlier.

Platinum also took a hit of around 6% or so and looks cheap to me once again, but in terms of taking advantage of the accompanying drops in the shares prices of producers of these precious metals, I can currently see more value amongst the larger gold and silver miners, than the likes of Anglo American - which although is the world’s largest producer of platinum with around 38%, has seen its share price hold up relatively well thanks to its other interests in metals such as copper and iron, which have been performing strongly of late.

Rather than seeing last week’s action as a sign of further weakness to come for gold and silver, I view it as more likely to be a temporary blip, and one which offers the chance to pick up shares in some of the safer mining companies at a good price.

Most were predicting gold to surge if Trump won, and although that is yet to happen, the forecasts in general are still for a strong year for gold in 2017, despite some concerns about Fed rate rises - any rises are expected to be small and very gradual.

I also believe that silver will perform strongly in 2017, partly as a result of increased demand for industrial uses, as well as based on its precious metal store of value function as a safe haven against any falls in the Dollar.

With that in mind, I turn to two old favourites of mine that offer good leveraged plays on the value of gold and silver itself, as well as both being strong companies and therefore offering a decent level of security and limited downside – barring a full-on crash in commodity prices, which seems unlikely with the Dollar currently showing signs of weakening, plus a bit of a pullback for some of the major share indices.

The first is Randgold Resources (RRS), which is nearly 40% lower than the highs it reached back in July, with the share price closing at 5955p on Friday, but I think we could well see a dip to the 5800p area at the start of next week, if gold is still weak.

The company has been performing very well of late, not just as a result of the higher gold prices but also due to production for the last quarter being 7% higher and a corresponding 9% reduction in total cash cost per ounce, so from an operational point of view things are looking very good – especially with Tongon and Kibali showing some good figures in terms of increased production.

That higher production helped reduce total cash cost per ounce to $663, resulting in profit from mining activity of $197 million, and an overall post-tax profit of over $77 million for the quarter.

These mining companies generally trade off of quite a high PE ratio, and the current one for Randgold, extrapolating the figure for the past quarter, would be in the order of 26, which seems quite reasonable and I would be happy buying. Net assets as at Sept 30 stand at over $3.6 billion.

The company doesn’t pay much in the way of a dividend, but the main reason for investing here, as I see it, is the potential upside off the back of any sort of gold recovery, and that means you will need to keep a close eye on the metal itself as well.

Another company which produces large amounts of gold is fellow FTSE100 miner, Fresnillo (FRES), but it is even better known as the largest silver producer in the world.

This is another where although I see potential at its current share price of 1,435p, there will be chances to get in even cheaper unless silver futures have a good bounce on Sunday night when the markets open again.

But I wouldn’t leave it too long or get too greedy, as I can see a sharp bounce coming for silver prices, with a knock-on effect on Fresnillo.

The last update showed that production was down around 9.4% on the previous quarter, but was still up by 6.3% overall for the current year so far, with 37 million ounces having been produced. The target for the current year is 49-51Moz of silver along with 850-870koz of gold, and for the first six months of 2016 the company generated a post-tax profit of $165 million.

That means that it is trading off a PE ratio of around 30, and I also see it as being slightly more risky than Randgold, but still offering plenty of upside.

The real gamble here isn’t on the companies themselves, as both are sound financially, but on the commodities themselves, and this is a way of disproportionally benefitting from any upwards movement in price, but the flipside of that is that these equities also fall faster than the physical metal at times when the price is dropping.


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