Ask The Fund Manager - BlackRock Gold and General
28 Jul 2011
As the price of gold continues to soar, we asked Evy Hambro, Fund Manager of BlackRock’s Gold and General Fund our own questions about what’s fuelling the rising price of the commodity.
The BlackRock Gold and General fund features in our Hero Fund List of 75 best ideas. It aims to achieve long-term capital growth by investing in gold, mining and precious metal related shares. It tends to be volatile and is particularly suitable for diversification in a larger portfolio. Evy Hambro is also the joint Chief Investment Officer of the Natural Resources Equity team within BlackRock's EMEA Fundamental Equity Portfolio Management Group.
What are the main factors contributing to the gold price at the moment?
The gold price continues to reach record highs in nominal terms, but is still some way off its inflation adjusted all time high. As with any commodity, it is important to look at both supply and demand trends when thinking about the price. Investors can often make the mistake of focusing on only one area - there are often many to consider.
Over the last few years, investment demand has been the driving force behind the gold price as investors have been worried about the resilience of the global recovery and the volatility in financial markets, especially paper currencies such as the euro and US dollar. As the global economy still looks beset by various challenges such as sluggish growth in the developed world, high inflation in emerging economies, an elevated oil price and the sovereign debt crisis in Europe, this trend looks set to continue in the short term. Furthermore, gold also benefits from its characteristic as a ‘safe haven' asset in times of geopolitical uncertainty and through its popularity in jewellery.
It is also worth noting that the supply side of the gold market has struggled to keep pace with this increasing demand. Although the gold price has increased by over 350% since 2001, mine production has experienced relatively meagre growth. Some analysts are also commenting that recently central banks have switched from being a supply factor for the gold market (through selling their holdings on) to being net consumers.
What do you think is the main risk to the gold price?
One of the factors which could cause the gold price to fall is if real interest rates rise. ‘Real' interest rates are interest rates which have been adjusted to take inflation into account. When real interest rates rise, the interest that an investor could gain in other investments, such as a bank deposit, increases (and as such the opportunity cost of gold increases). As a result, it is possible that some investors may sell gold in favour other assets.
What is going to stop the rise in commodity prices creating a real inflation problem?
Commodities are only part of the inflation equation; there are many other factors that can influence inflation. Commodities can impact inflation in different ways depending on where you are in the world. However, if investors are worried about inflation then perhaps investing an element of their portfolio in commodities or commodity equities, as a potential means to mitigate some of these pressures, may be attractive. As always, investors should consider a range of facts when investing including inflation, growth, commodity prices and interest rates.
Why are the shares of gold mining companies a good way to gain exposure to gold?
Gold equities are positively correlated to the price of gold bullion over the longer term. Indeed, over the longer term, active gold equity funds, such as the BlackRock Gold and General Fund have significantly outperformed bullion. There are three key drivers of this outperformance: the ability to provide operational leverage to the gold price, the benefit of dividend payments and strong growth potential. Although, as with any equity investment, gold equities are susceptible to stock market risk. It is important to remember however, that not all gold companies are created equal, and some will do better than others even when the gold price remains flat. As a result, superior stock selection can help maximise returns.
What are the main aspects you consider when looking at a potential stock?
We tend to invest primarily in high quality companies with good growth opportunities and long life reserves. Mines are wasting assets, so the starting point for us is the quality of a company's ore reserves. We place a high emphasis on meeting management teams and create our own financial forecasts and analysis of the company. We also take care to consider how sensitive the company is to a change in the price of gold.
What is the biggest current risk to the performance of the fund?
As always, the biggest risk to the BlackRock Gold & General Fund would be rapid deterioration of the gold price. Given financial market uncertainty, we retain a constructive view on the outlook for gold.
Next week we will be speaking to Trevor Greetham, manager of the Fidelity Multi Asset Strategic Fund.
The views expressed in these questions and answers may not necessarily reflect the views of TQ Invest.
