London, 13 April 2011: Commodities Now

The problem with gold and silver equities: One of the best performing commodities this year is silver, up over 32%. Thus it may come as a surprise that the share price of Fresnillo, one of the world’s largest silver producers, is in fact now lower than it was at the beginning of the year. This is despite the fact that there has not been any noteworthy negative newsflow from the company.

So why do investors treat precious metals equities with such apparent disdain? For gold equities, this is an easier question to answer and includes the following generalisations, according to Daniel Brebner of Deutsche Bank:

1) Poor earnings growth

2) Poor production growth

3) Cost inflation

4) Political and technical risks and,

5) A history of hedging.

Perhaps however, there are some other factors which are more fundamental he suggests. "We think investment demand is the key factor responsible for driving both gold and silver higher. Therefore one could make the conclusion that a buyer of precious metals equities is looking to gain exposure to that trend in investor bias. This seems needlessly indirect, as most investors can easily gain exposure to the metals via physical or related derivative or ETF.

"Another aspect is the distinction between physical possession and the promise of receiving metal in future. For many investors in gold and silver, owning physical metal is considered more attractive than the promise of future deliveries from a mine. If this is in fact the case, then perhaps one could make the postulation that the market for gold is in fact quite tight, with strong spot/physical demand and future metal being increasingly discounted via the de-rating of precious metals equities (a kind of theoretical backwardation)."

"Certainly this does not seem to be the case currently in the forward market for gold, which remains in contango, but then the gold market is challenged (at least for now) by the availability of government stockpiles. Silver is not hampered by such an apparent overhang. It will be interesting to monitor the relationship between the underperformance of silver equities and the appearance of backwardated markets going forward," Brebner adds.

Ends --

Daniel Brebner, CFA, (44) 20 7547 3843, This e-mail address is being protected from spambots. You need JavaScript enabled to view it