Turkey of the week: silver miner caught up in the frenzy

So far this year, the price of silver has risen 20% against 7% for gold. But Paul Hill thinks there will be a shift from precious metals to less risk-averse assets. Which will hurt miners such as this week's turkey.

By Paul Hill

Published 13 March 2009 In Features

Precious metal prices have shot up amid fears over currency devaluation and general market uncertainty. Gold is trading near all-time highs because every man and his dog has jumped on the wealth-preservation bandwagon. In fact, one man recently showed me a gold nugget dangling around his neck, which he'd bought with his life savings. This sets alarm bells ringing, especially when the same pundits who said that oil would hit $200 a barrel are declaring that gold will hit $2,000 an ounce in the next 18 months.

Fresnillo (LSE:FRES), rated a BUY by Investec

Sure, if the Bank of England makes a pig's ear of quantitative easing measures, then they could be right. But to me the gold price now seems way out of line with its intrinsic worth. My long-term view is that gold should be roughly ten times the price of oil. Over the past decade it has bounced between 14.5 in 2002 and 7.4 when crude peaked last summer. Now the ratio is 20. If I'm right and this is another bubble, then it's bad news both for gold stocks and for silver miners like Fresnillo, which have also been whipped up in the frenzy. So far this year, silver has risen 20% against 7% for gold. The big difference is that silver is mainly an industrial metal used in cell phones, refrigerators, and photography. At these levels there will be demand destruction.

Start your trial of MoneyWeek today

Get unparalleled financial insight, analysis and expert opinion you can profit from.

Start your trial

https://cdn.mos.cms.futurecdn.net/flexiimages/mw70aro6gl1676370748.jpg

Sign up for MoneyWeek’s free twice-daily newsletter.

Join more than 165,000 subscribers and keep yourself informed with latest financial news, insights and expert analysis to help you understand what really matters when it comes to your finances.

Fresnillo is the world's top silver producer and Mexico's largest gold miner. Its shares are up 350% since December. Last year, turnover of $720m was split 57% silver/36% gold, with the rest coming from lead at 4% and zinc extraction at 3%, delivering total earnings per share of 18.6 cents. For 2009, revenues and earnings per share are set to jump to $810m and 34 cents respectively, putting the stock on an unsustainable-looking p/e of 16.9. Fresnillo also has substantial geopolitical risk: all its assets are located in Mexico. Penoles, which was spun out of the Mexican industrial group, controls 77% of Fresnillo's shares. And one also needs to be aware that the silver market is far smaller than gold's and is thus more readily manipulated by speculators. I do appreciate silver's merits as a safe-haven asset, but I don't like the hefty premium one has to fork out for this insurance. I would take profits and redeploy the proceeds elsewhere. I recognise that my bearish tones aren't currently shared by the rest of the MoneyWeek team, yet at some point there will be a concerted shift in sentiment away from precious metals to less risk-averse assets.