Despite the FTSE 100 recently hitting an all-time high, there are still a number of stocks that trade at historically low valuations. One industry that continues to be shunned by investors of all types is precious metals miners. But with gold decisively breaking out above $2,000, the train looks about ready to leave the station.
New gold cycle
I continue to believe that we are in the very early innings of another bull market for precious metals. To get in on it, I could buy gold and silver bullion. As a direct consequence of inflation, Costco is tapping into consumer interest by selling gold bars in the US. But I need to consider storage costs.
Another way is to buy shares in an ETF. For large-cap stocks, VanEck Gold Miners is the most popular. However, I want to beat the benchmark index, so my choice is individual stocks. My personal favourite in the FTSE 100 is Fresnillo (LSE: FRES), the world’s largest primary silver producer and Mexico’s largest gold miner.
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Exploration potential
There are over 3,500 publicly traded mining and metals stocks globally. That’s more choice than in any other industry. The issue is that the vast majority are junior explorers. These don’t own revenue-generating mines, just a hope of finding the next big discovery.
Investing in junior gold mining stocks has the potential to generate life-changing sums of money. But without specialist knowledge of geology, geophysics, and geochemistry, I wouldn’t know how to interpret their drilling results. And I always remember the words of Mark Twain: “a gold mine is a hole in the ground with a liar standing on top of it”.
Many of its larger peers, including Barrick Gold and Newmont, have little appetite for exploration. Their strategy is growth by means of acquisition. Fresnillo is different. Not only does it have eight major active mines, but it also has a very good track record of finding new discoveries and taking them into full production.
Major risks
Investing in precious metals miners is by its very nature, risky. Fresnillo itself has suffered many setbacks lately. A tight labour market and revaluation of the Mexican peso relative to the US dollar were two of the biggest in 2023. And like every other mining company out there, supply chain issues and inflation continue to erode margins.
I am not a gold bug. I invest where I see opportunity. And to me, precious metals represents one of the best opportunities at the moment.
While most investors continue to chase mega-cap tech stocks and believe that AI is about to imminently transform the world, I take a completely different stance.
Unsustainable debt and government deficits across many Western economies, most notably the US, is resulting in inflationary pressures.
The world today is hungry for commodities. This is evident from the huge investments being made in green infrastructure projects, to name just one example. But as the industry continues to be starved of capital, I see a supply cliff on the horizon.
Mexico remains one of the most important geological locations for high-grade gold and silver ores. And I think, with its 500-year mining history, Fresnillo remains one of the best stocks to capitalise on a new gold cycle. That is why I continue to accumulate the shares when finances allow.
