The Fresnillo (LON: FRES) share price has experienced a challenging 12-month period. The gold and silver miner’s market value has declined by around 28% since the start of the year in what has been a tough period for the wider sector.
Indeed, a number of the company’s sector peers, including Barrick Gold and Polymetal, have also recorded significant falls in their share prices in 2021. This could be due to concerns about the prospect of a rise in interest rates in response to higher inflation.
While gold has historically been viewed as a possible hedge against inflation, higher interest rates can inhibit its potential to deliver price rises. They make other assets, such as bonds and cash, seem more attractive relative to gold because they offer higher incomes. Conversely, gold itself does not offer an income return.
Looking ahead, the Fresnillo share price could continue to experience a degree of volatility in the coming months. The US Federal Reserve has so far adopted a relatively dovish stance in response to the highest inflation figures for over 30 years. However, should higher inflation continue, it would be unsurprising for them to taper their asset purchase program and even raise interest rates in order to try and combat higher inflation.
Of course, that path is by no means guaranteed. Factors such as the potential for new Covid-19 variants that prompt additional containment measures may cause policymakers to avoid an increasingly hawkish stance. Moreover, concern about the performance of the economy could lead to a slower pace of interest rate rise than would normally be expected. This could be good news for the gold price and gold miners such as Fresnillo that are highly dependent on it.
Recent updates from the firm have, of course, been somewhat mixed. New labour laws in Mexico have caused a degree of disruption. However, its latest production report stated that silver production is on track for the full year, while it expects gold production to beat previous guidance.
Trading on a forward price-earnings ratio of around 16, Fresnillo appears to be fairly valued based on its long-term prospects. Although further volatility would perhaps be unsurprising in the coming months, and its share price prospects may be closely linked to the economic outlook and the path taken by the pandemic, it could offer long-term recovery potential.