Investing in gold

3 September 2014 - Three years ago, the price of gold bullion hit an all-time high. Since then the asset class has seen sharp falls and high volatility. Darius talks to Evy Hambro, manager of the BlackRock Gold & General fund, which is on the Chelsea Selection, about gold investments in 2014.

Evy Hambro, manager of the BlackRock Gold & General fund

Q: The price of gold is down 33% from its high three years ago and last year was particularly difficult for the asset class. It appears to have bounced back a bit over the summer though – what is going on?

“2013 was a torrid year for gold. Having seen a solid flow of investments in the eight preceding years, investors withdrew 903 tonnes from gold Exchange Traded Funds (ETFs), which caused the price to fall dramatically.

“This year, the asset class has been more stable.  ETF withdrawals have continued, but at a much slower pace. Increased geo-political risk in the Middle East and Ukraine has prompted some safe haven interest – investors turn to gold at times of crisis – and central banks have continued to buy the asset, with Russia being one of the key purchasers lately.”

Q: Do you think the fortunes of the asset class are finally turning and we could see prices start to rise again?

“We are now entering a seasonally strong period for physical gold demand, with the onset of the gifting season in India. This could be given further momentum if the recently elected government relax the restrictions that have been placed on gold imports. These restrictions were put in place to help ease the country’s current account deficit, which is now looking a lot healthier.

“Another factor which could give the gold price some support is the fact that the gold mining industry is still cutting back on capital expenditure. This lack of supply growth means there will be less gold to meet demand in future years.

“However, a strengthening US economy and US dollar could continue to be a drag.”

Q: So what do you expect gold bullion to do in the next six months or so?

“I expect the price of bullion to move between a range of around $1,250 to $1,350/oz over the medium term. Longer term, it has the potential to break out of this range, but only if demand picks up due to increased inflation expectations and/or systemic financial risks re-emerging form the financial sector. The former is probably the more likely scenario.

Q: My own personal investment in gold has been via funds which invest in gold shares. I’ve been waiting for the miss-match between gold shares and the price of bullion to correct itself for a number of years now and been disappointed. Do you see this changing any time soon?

“Gold equities have just begun to exhibit a meaningful relationship with the gold price once again – a relationship that, as you say, broke down for a number of years.

“This re-emergence of the linkage between physical gold and gold equities is a reflection of a rising gold price delivering margin growth for gold producers, as the cost environment for companies has improved. Furthermore, the improve capital discipline, better operational efficiency and a greater focus on shareholder returns are becoming increasingly evident in the industry, helping to improve investor sentiment.

“I also see the potential for a period where, as interest rates remain lower for longer, and wage and asset appreciation continues, we may see a significant rise in inflation. This would likely create a favourable environment for those areas of the market that can be viewed as a protection against inflation, such as gold.

“So after a very difficult couple of years, I’m broadly positive that the asset class has stabilised and opportunities are starting to present themselves.”