Gold fundamentals remain strong
Investors questioning the portfolio implications of the recent volatility in gold and gold-related assets have been reassured by Evy Hambro, Chief Investment Officer of the BlackRock Natural Resources team.
Gold prices dropped approximately 12% (from US$1565/ oz to US$1377/ oz) between 11 April and 16 April 2013.
In a conference call with investors Mr Evy Hambro, Chief Investment Officer of the BlackRock Natural Resources team, said: “In essence what we have seen here is the outflow of the ‘hot money’ that was in the market.
“The recent series of trades is the main reason for the move in the price.
“However in terms of the overall role of gold in the portfolio as a long-term play, the fundamental drivers have not changed. People taking longer, more traditional positions are not likely to sell.”
In considering the value of gold stocks, Mr Hambro said: “Recent events will give greater traction to gold managers who are moving to a more shareholder friendly way of doing business, keeping costs down, not dropping cutoff grades and not using high prices to calculate worth.
“As far as BlackRock is concerned, these are the companies we have invested in and as a consequence have outperformed materially in the recent gold selloff, during which we trimmed our holding considerably.
“We would not be looking to, or expecting to see, much forward selling because we’re now close to the spot price. In fact, we put some cash to work yesterday to take advantage of the low price.”
Mr Hambro also made the following points:
- It is thought the equivalent of 100 tons of gold futures were sold last week, followed a few hours later by a trade of some 300 tons, likely due to programmed trades kicking in following price drops. While still positive in long positions, the shorter term market became bearish from that point. At the same time the market saw a sharp rise in the physical gold premium, including in demand from traditional markets in Shanghai and India as well as some less traditional pockets in the developed world – although there has been no visible central banking activity on this front.
- Profits have been taken in the past two months, prior to the most recent sell-off, as evidenced in redemptions from hedge funds.
- Current prices leave gold trading close to the marginal cost of new supply, putting it more in line with the pricing structures prevailing for other commodities such as aluminium, zinc and so on.
- The gold companies that have responded positively to investor demands to improve practices, including acceptable leverage and realistic valuation levels (closer to US$1000/ oz), are unlikely to be severely affected by the current situation and in fact will be well positioned to maximise the benefits of a recovery.