Image source: Getty Images
At the beginning of 2024, gold was hovering around the $2,000 mark. Fast forward 12 months and the price of the yellow metal is up 33%, well done to pass FTSE 100. The question I’m asking myself now is how long it will take before precious metal mining stocks start to fall.
Gold and silver miner
Since Centamin was bought by AngloGold Ashanti at the start of this year, there weren’t many listed precious metals miners in the UK to choose from. But another company I have admired for a long time Fresnillo (LSE: FRES).
Unlike many of its peers, Fresnillo mines both gold and silver; indeed, it is the world’s largest producer of silver.
This year, the price of silver has underperformed gold. Yes, the metal has risen too much to trade in the low $30 range. However, this is well below the $50 all-time high last seen in 2011. But silver is like a coiled spring and when it moves, its blink-and-you-miss-it motion is literal.
Unique attributes of silver
One of the main reasons why I hold gold mining stocks in my portfolio is that gold is a currency. As the debt of Western economies continues to grow, having a neutral asset that cannot be printed like paper currency, is very important.
Like gold, silver is money. It is also an asset that has a history of performing well in inflationary conditions. But silver is also an industrial metal, with a variety of applications.
With its excellent electrical and thermal performance, silver is an important component for both solar photovoltaics and electric vehicles. Demand for both is expected to grow over the next 20 years.
About 10% of a solar panel is made of silver. China is the leading producer of solar panels. But the US is also investing heavily in technology.
In the first half of 2024, solar accounted for 59% of new generating capacity in the US. The following chart highlights how important solar is becoming in the US energy mix.
Source: US Energy Information Administration
Accidents
As a small precious metals miner, the company’s share price can show unusual fluctuations. For example, when silver and gold prices rose earlier in the year, their prices rose 50% in two months, only to explode as the metal’s prices softened.
Rising costs of raw materials, including diesel and explosives, hurt its margins. But as the price of its products increases, I expect the margins to improve significantly next year.
Unlike many of its peers, it invests heavily in testing. The challenges involved in undertaking such tasks are immense. If the expected new mine fails to materialize in the coming years, that would be a disaster for shareholders.
Investors remain wary of buying miners. But for me, mining stocks represent one of my biggest faith plays. When sentiment about the entire industry is very low, that’s when the biggest opportunities present themselves, in my opinion.
I have been buying large shares of Fresnillo throughout the year 2024. If I hadn’t been so invested, I would have picked up more cheap stocks today. But I think investors should consider the stock as part of a diversified portfolio.
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