James Burns: Why gold is shining in the current climate

James Burns 160 byline

The outlook for global equities has arguably grown more positive over the past couple of months with governments and politicians taking more serious steps to shore up their economies and boost growth.

Mario Draghi’s announcements in August and September citing his intention to ensure that the Euro survives and latterly the commencement of ‘Outright Monetary Transactions’ have buoyed investor confidence.

Additionally, Federal Reserve chairman Ben Bernanke’s initiation of QE3 and the pledge to keep interest rates in the US low until at least 2015 have helped and the Bank of Japan has also extended its asset purchase programme.

Our expectation is that due to this global monetary easing, and inevitable debasement of currencies down the line, the price of gold will remain firm for the foreseeable future.

More interestingly is the fact that gold equities have suffered a severe de-rating over the past eighteen months, partially due to the risk on, risk off environment investors have experienced.

With gold today around the $1,700 level there is plenty of scope to see potentially substantial upgrades in both earnings and dividends from these companies and we believe that any increased risk tolerance from the market could benefit the asset class too.

Across our range of multi-manager funds we have added to our gold equity exposure over the summer and are confident that the current environment should be conducive to decent appreciation of these assets over the medium term.

We have several investments to gain exposure to this theme.

Our largest position is in BlackRock Gold & General run by Evy Hambro. This is very much the dominant player in the sector in terms of history and size. We have held this for several years and have been rewarded with excellent returns.

Our only criticism would be that in our mind, due to its size, it is unable to fully exploit the really exciting opportunities further down the market cap scale. The flip side to this however is that it tends to be less volatile than those funds that are more mid and small cap focused.

On that note, another position we have added to is Golden Prospect Precious Metals run by New City Investment Managers.

This investment trust is a relative tiddler with total assets of just under £60m and it offers exposure to smaller companies, primarily focused on gold and silver. It has a bias towards producers that may potentially hugely benefit from any further appreciation of the gold price. We rate the team at New City highly and our only other position in this space is also managed by them.

The City Natural Resources High Yield trust has a slightly broader investment mandate than its aforementioned stable mate and invests across the commodity space. It does however have a 30 per cent weighting to gold equities today.

Once again it has a bias to companies down the market cap scale that could show more sensitivity to the price of gold than their larger counterparts. This investment trust has convertible unsecured loan stock as well as ordinary shares in issue, of which we own both. We have though reduced our exposure in the CULS to increase the ordinary shares, reflecting our more positive stance for gold mining companies.

James Burns is head of multi-manager at Smith & Williamson