Blog - Investing in gold
14 Sep 2011
Investing in the shares of gold and other metals mining companies has been a rewarding place for investors in recent years. The price of gold has reached all-time highs recently of over $1,800 per ounce which has caught the attention of investors.
This optimism comes with a word of caution, as investing in this asset class is potentially higher risk and can be volatile. The price of gold, and related companies, may be subject to sudden, unexpected and substantial fluctuations. This can lead to significant declines and significantly impact investment performance. Many investors should only commit a small part of their portfolios to gold and other metals.
Despite the recent strong returns, and volatility that has accompanied this, a number of fund managers remain optimistic. Firstly, there has been a lot of liquidity in the form of Quantitative Easing (QE) injected into the marketplace by central banks in the Western world, as developed economies around the world try to reflate their economies.
Fund managers feel that central banks are trying to create some conditions of inflation which helps countries get out of the debt situations that have arisen in the last number of years. This Quantitative Easing helps to weaken currencies which makes manufacturing more competitive and helps to reduce the output gap or unemployment. All of this activity is positive for the gold price going forward as people seek refuge from inflation and money printing. Secondly, the supply side for gold still remains very constructive as well, as there hasn't been a big increase in mine supply despite the rise in gold prices.
There are very few new mines opening and looking out over the next five years or so there is little new production coming on stream. So over the past 10 years, there has essentially been unchanged annual output whilst demand for gold has grown, pushing the price up. In fact some of the largest investors, such as pension funds, endowment funds and sovereign wealth funds, and even the central banks themselves that have previously been sellers of gold, have now come back and are buyers.
Silver has outpaced the performance of gold over the last year or so and as well as offering precious metal characteristics, silver has a number of industrial applications and is heavily used in the alternative energy industry. Diamond prices have also reached post-Lehman highs (the demise of Lehman Brothers in September 2008). Whilst gold and other precious metals remain an attractive investment proposition, global resources funds tend to diversify and invest in companies that mine other metals. For example, fund managers are optimistic about the prospects for platinum and palladium. There is increasing demand for automobiles, especially from the East, and those metals are used in catalytic converters.
Another theme is the rare earth elements, where there has been growing demand for these very specialist metals which are used across various applications and in particular new technologies. For example, hybrid cars use a lot of magnets that are made out of rare earth metals, and therefore without those it is very hard to manufacture hybrid cars.
Elsewhere, the outlook for base metals, such as copper, and also coal, are driven by the uptick in economic activity around the world, and in the short term the fund managers believe there is still an opportunity for good performance of companies mining these commodities. They are also quite optimistic about the agricultural sector, with increasing demand for potash fertiliser, as there is an increasing number of mouths to feed and potential shortage of certain crops given changing weather patterns. All in all, there are a lot of exciting trends that are happening right now and fund managers are trying to take advantage of them.
In short, fund managers therefore believe that the general supply/demand characteristics are still very positive. This does, however, come with some performance volatility, and sometimes prices will overshoot whilst at other times they will undershoot. This may not suit all clients.
The performance of funds investing in gold and resources companies has been generally strong in the past five years. For investors looking to add gold to their portfolio, below are listed three funds that invest in gold equities which may be worth considering.
The Smith & Williamson Global Gold & Resources has the advantage of being managed in Toronto where it has excellent access to the management of the mining companies, mining engineers and the stocks listed in Canada. Over 40% of world mining companies are listed there. The fund aims to achieve capital growth by investing primarily in the shares of gold mining companies, precious metal companies and resource based companies.
The BlackRock Gold & General fund run by Evy Hambro aims to achieve long term capital growth from an actively managed portfolio of gold mining, commodity and precious metal related shares.
The JPMorgan Natural Resources fund is run by veteran commodity investor, Ian Henderson. His investments are predominantly in small and medium sized companies and the fund can be subject to bouts of extreme volatility. This fund may be one to pick if you believe in the long term growth story of commodities, fuelled by the demand of emerging nations.
