One reason why investors should sell stocks on the way up is not just to spend the profits, but to make sure they have cash available in the event of a pullback. When the next correction occurs – which I suspect will be before December – then those investors who are ‘all in’ will miss out on a deluge of buying opportunities. I’ve been taking profits all the way up this powerful rally and now have over 40% of my portfolio in cash. That’s painful when savings rates are zilch, but this is a time for capital preservation, not heroics.
What does this mean for precious metals? I believe this is a heavily congested trade with the prices of both gold (at $1,150 an ounce) and silver (at $18 an ounce) bubbling near multi-decade highs. In 2009, speculative purchases of the yellow metal even overtook jewellery demand for the first time since 1980.
Sure, gold could blast through the $2,000 mark if the Bank of England makes a mess of quantitative easing. But otherwise, the price seems out of kilter with its intrinsic worth. My view is that gold should be roughly ten times the oil price, giving a fair value of less than $900 an ounce. If I’m right, it’s not just bad news for gold, but also for silver miners such as Fresnillo. Over the past 12 months, silver has risen by 52% compared with 31% for gold. The big difference is that silver is primarily an industrial metal, used to make cell phones, refrigerators and computers. Hence the sky-high prices will soon feed through into another round of demand destruction.
Fresnillo (LSE: FRES), rated as ADD by Numis Securities
Fresnillo is the world’s top silver producer, with a 12% market share, and the largest gold miner in Mexico. Its share price is up eightfold since November 2008. Last year its turnover of $720m was split 56% silver, 38% gold, with the rest coming from lead (3%) and zinc (3%) extraction, delivering total earnings per share (EPS) of 44.9 cents. For 2010, revenues and adjusted EPS are set to jump to £707m and 36.9p respectively – putting the stock on a top-of-the-cycle p/e ratio of 22.8.
It’s also worth mentioning Fresnillo’s substantial geopolitical risk. All its assets are located in Mexico. It’s also 77% controlled by Peñoles, the parent group out of which the firm was originally spun. Also, one has to be aware that the white metal market is much smaller than the one for gold, and therefore is more readily manipulated by speculators.
Don’t get me wrong, I appreciate silver’s merits as part of a diversified portfolio and think Fresnillo is a quality business. What I don’t like is the hefty premium one has to fork out for this safe-haven insurance, against the small probability of a systemic breakdown in paper currencies. I would take profits on this trade and re-deploy the proceeds elsewhere. I recognise my bearish views are not shared by the rest of the MoneyWeek team, yet at some point there will be a concerted shift in sentiment away from expensive precious metals and into other, cheaper assets.
Recommendation: TAKE PROFITS at 835p
• Paul Hill also writes a weekly share-tipping newsletter, Precision Guided Investments