Gold funds are likely to see significant further gains on top of their substantial rally in the dismal markets of 2016 so far, according to Hawksmoor’s Ben Conway.
The co-manager of the PFS Hawksmoor Vanbrugh fund, alongside Daniel Lockyer and Richard Scott, has very recently decide to up exposure to the £399m Ruffer Gold fund as a hedge against further falls in global equities
According to FE Analytics, specialist gold funds have been the best place to be in 2016 having clocked up stellar gains of more than 20 per cent putting them at the top of table of the some 3,500 funds in the Investment Association universe.
The likes of the Investec Gold, MFM Junior Gold and Blackrock Gold & General funds have led way with the WAY Charteris Gold & Precious Metals, Smith & Williamson Global Gold & Resources and Ruffer Gold funds not far behind.
Performance of funds and index in 2016
Source: FE Analytics
The reason for the rally in these funds is mostly down to gain in the spot gold price this year of 19.18 per cent, says Conway, who started buying the Ruffer Gold portfolio back in November.
However, he is upping his exposure at the cost of some of his ‘core’ UK equity fund holdings such as in Thomas Moore’s Standard Life Investments UK Equity Income Unconstrained fund.
“We think a key attribute of gold at the moment that is driving its price up, which has happened in all currencies, is that it is clearly an expression of a loss of faith in central banks. More specifically, a loss of faith that central banks have the ability to deal with the very manifest problems that developed economies are facing,” he said.
“Gold on its own does not have any cash flow so you have to be sure it is going to offer you something different for your portfolio, such as going up when other things are not going up. It is one of those assets that brings genuine diversification and one that can express a loss of confidence in central banks actions which is clearly going on now.”
“There are problems in the world at the moment and central banks can only do so much. They tried and now they are trying negative interest rates, at least in Japan. The way the market has reacted shows what it thinks of that.”
The 2016 rally in these gold funds, which invest in the firms mining gold rather than physical gold, follows five consecutive years of losses for the portfolios thanks to downward trend for the gold price
Source: FE Analytics
Conway says by investing in gold miners, via the Ruffer Gold fund, any small increase in the price of physical gold will mean larger returns from the funds’ holdings.
“You get more bang for your buck with gold mining equities. Also, their costs are falling because they are paying their workers in currencies that are depreciating while earning their revenue in a currency that has been a lot stronger.”
“The near term outlook for gold miners is very, very strong but for us it is more that when the gold price goes up, gold mining equities should go up by a lot more. Although this can be a lot more volatile we are increasing this as a hedge. It is a much more efficient way of buying it given our belief that there is a very strong likelihood of people losing faith in central banks.”
FE Alpha Manager Geoff Legg, who co-manages the Kennox Strategic Value fund sees “exceptional opportunities” in the gold space over the longer term.
“Gold is obviously interesting right now because stock prices have gone up 30 to 40 per cent this year without the gold price moving too far.”
“We are starting to get a slightly more shareholder friendly environment, better supply-side dynamics but a huge part of the industry is still under water in terms of $1,200 gold as a third of production is now unprofitable – so it’s a question of when that recovers.”
“It’s interesting to see such a big move over recent weeks, but if you look over a 10 year graph, it hardly looks like anything at all.”
Performance of Gold over 10yrs
Source: FE Analytics
He says there are others reasons for specific to the business side of the gold miners that have driven their rally.
“It is quite interesting to look at the capex and the fact it peaked in 2011/2012 so we have had almost five years since the gold price started falling and capex is off about 50 per cent.”
“There are a whole load of statistics on the gold mining industry which are interesting such as discoveries peaked 20 years ago and it used to take 20 years from discovery to production. So you have a startling correlation between production today and discoveries 20 years ago and we have discovered almost no gold since 2000.”
“But that supply and production side of it is only just starting to come off now. You are looking at an industry now where it was cheaper to buy Newmont Mining as a whole, than it was to build mines from scratch.”
This has resulted in a supply-side reaction, which could mean an enormous further rally in gold mining shares.
“Money comes out of capex and goes into acquisitions and coupled with the fact that most companies (before they bounced recently) were off 80 per cent if not 90 per cent since their peak with gold only falling 30 per cent.”
“I wouldn’t be surprised to see the price of gold doubling or tripling and the companies are now far cheaper than they were and are better run due to lower capex.”
