The Fresnillo (LSE: FRES) share price has been on a rollercoaster ride lately. After gold and silver prices cratered over the past few days, the stock collapsed over 20%. Today, (22 October) the FTSE 100 precious metals miner rallied a little in early trading as investors weighed up whether recent weakness had gone too far. So, with silver prices still hovering near $50, where next for the stock?
Pullback
Every time I have put pen to paper on this one, I have warned investors that a pullback was coming. But timing such a move is, of course, impossible.
If an investor had have sold out six months ago, when its share price was at a decade high, they would have lost out on its biggest gains.
Yesterday, silver prices fell 8% for their biggest daily fall in years. Many reasons can be given. These include a strengthening of the dollar, and improving trade relationship between China and the US. And of course, the metal had just simply got ahead of itself.
In my opinion, daily moves in prices are simply irrelevant and just noise. I prefer to look at long-term trends.
Central banks
The number one buyers of gold and silver remain central banks. Many, like China, have been accumulating for a decade. I do not see this trend reversing any time soon.
The reasons why they are doing so are multi-faceted. But I think the best way to examine it is through the lens of the new slogan on Wall Street: gold has become the “debasement trade”.
Total US debt is now larger than the country’s GDP. With interest expense on the debt bigger than the entire defence budget, the US administration is pushing the Federal Reserve to lower interest rates.
The bond market, though, is rebelling. Debt investors are becoming increasingly concerned that interest rates are falling while the US economy remains strong, but with inflation nowhere near tamed. That is making gold an increasingly attractive option for both central banks and institutional investors.
Volatility
In my opinion, the days of gold and silver just moving up are over. At least for now. This is the classic shake-out moment, where speculators and those taking profit, move out.
However, for investors with a long-term mindset this vicious pullback could be the opportunity they have been looking for.
The reason why I like Fresnillo over other FTSE 100 miners is because of its significant silver exposure.
The supply-demand dynamics of silver look extremely favourable. Remember, silver is not just a monetary metal but has numerous industrial applications. For example, I do not see the proliferation in solar panels reversing any time soon.
On the supply side, production remains extremely constrained. Mexico is the largest producer of silver in the world. However, despite prices rising, production has not ramped up accordingly.
The reason is simple: there are real constraints on bringing new supply on-line. It takes on average 15 years for a project to go from exploration to full production.
For investors with a strictly long-term mindset and who can look beyond the undoubted volatility, Fresnillo is a stock worthy of consideration.
