Capital Gold Group Report: Gold -- a Safe Haven Investment Against Market Volatility

by Ruth Sullivan,

The Financial Times

May 07, 2008, 00:36

Gold is holding its attraction as a safe haven for investors attempting to navigate the choppy waters of volatile equities, a falling dollar and a worsening macroeconomic outlook in the US.

Natalie Dempster, investment research manager at the World Gold Council, says: "The ongoing credit crisis and increased market volatility in the first quarter caused investors to seek safe haven investments, pushing up the price of gold to a new all-time high."

An appetite for gold last month drove the price to a record nominal high of $1,011 an ounce, though it has since slipped. "Although the gold price did not escape the volatility of the markets entirely, it did remain less volatile than other asset classes," adds Dempster.

Investment demand for gold has risen from nine per cent of total demand in 2001 to 20 per cent last year and is displacing jewellery demand, which has fallen from 77 per cent to 68 per cent in the same period, according to GFMS, the precious metals consultancy.

Inflows to gold exchange traded funds have been a key driver of rising prices. In the first quarter, investors bought 72 tonnes of gold in exchange traded funds (ETFs), taking total holdings to 943 tonnes, valued at $28 billion by the end of March, says the WGC.

The strong performance of the gold market has helped the BlackRock Gold & General fund, a unit trust, return 40.8 per cent in 2007 and 6.39 per cent in the first quarter of this year.

"Gold has a long history of providing a hedge against inflation, the weak US dollar and geopolitical tension," says Graham Birch, the fund manager.

He believes the price is underpinned by strong fundamentals such as limited supply and demand from investors and consumers.

In inflation-adjusted terms, gold does not look so expensive, argues Birch. "Putting today's price in perspective, it is worth noting that the previous high of $850 an ounce, set in January 1980, would be equivalent to approximately $2,279 in today's dollars."

Ian Henderson, fund manager at JPMorgan's Natural Resources fund, an open-ended investment company, has increased exposure to gold this year. Last year, the weighting was below 20 per cent but by the end of March it had increased to 28.6 per cent.

"Investor appetite has been robust over the past year but has been momentum driven by the high price [of gold] and will continue to be. If the price goes down investor interest will follow.

"Gold shares had a good run from August to January but they have been a bit disappointing in share price performance since then," he says. Nevertheless, he prefers to invest in companies that are leveraged to the gold price than to invest in ETFs.

Keeping an eye

Asset managers that are exposed to mining companies are keeping a wary eye on production problems. In South Africa, an energy crisis is triggering blackouts. Issues over the safety of mine workers are also adding to costs, leading fund managers to look at companies in China, South America and Russia.

A scaling back of exploration and the rising costs of extracting the metal are adding to problems.

Supply is not keeping up with burgeoning investment demand. During the 1990s, the price of gold was kept low by central banks selling off chunks of their reserves, adding to supply in the market.

As prices fell, mining companies reduced spending and industry investment has not kept pace with the subsequent rise in the price.

Mine production peaked in 2001 and is falling slowly, by three per cent in 2006 and one per cent last year. Barrick, the gold producer, forecasts mine supply will fall 10-15 per cent over the next five years because of a lack of new production coming on line.

In the near term, Henderson sees "real opportunities in Russia where there is a lot going on in mine development". He also sees prospects in Ghana and Bolivia. Some fund managers, such as BlackRock's Birch, have shifted asset allocation from South Africa to South America, Russia and China, helping to bolster returns.

At Investec's Global Gold fund, another Oeic, Daniel Sacks, the fund manager, is upbeat.

"The fund is up 10 per cent year-to-date in dollar terms and was up 18 per cent in the first two months but fell in line with metals in March." The fund, which is invested primarily in equities with a 15 per cent exposure to precious metal ETFs, could see returns of 30 per cent this year, he believes.

Sacks also likes "gold shares [in companies] that have an ability to grow production and output". He lists Rangold, Kinross and Gold Corp as among those increasing production.

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