Where next for gold? Interview with Blackrock Gold & General manager Evy Hambro

7th June 2013

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Gold historically viewed as the ultimate safe-haven for troubled investors during even more troubling times, has endured a tumultuous first half to 2013 writes Philip Scott.

The financial crisis saw the price of bullion, already on a hot streak, accelerate. So volatile was the period, investors piled into the precious metal in their droves, , either directly or via mutual funds or bullion price-tracking, exchange traded funds (ETFs).

Gold, driven by a number of factors including a weak US dollar, which it is often used as a hedge against, has enjoyed a bull run for the best part of 10 years. But in April this year, it suffered its biggest sell-off in more than three decades, taking some $1trillion off the value of reserves.

A number of theories in regards to the fall were put forward, one was that investment banking giant, Goldman Sachs, recommended clients go ‘short’ bullion, essentially bet against further rises for the time being as it cut its long-term forecast for the precious metal. Others believe that gold, following its 10 years in the sun, was simply about to go into a period of weakness. But for gold investors, professional and retail alike, the £1.6bn Blackrock Gold & General fund, has existed as something of staple commodities portfolio for the past quarter century.

It launched in April 1988, when the price of the precious metal was $450 per ounce, today it trades at some $1,410.

An investor who had invested a £1,000 lump sum at inception, would have seen that turn into more than £24,000 by the time it reached its 25th birthday in April, representing a rise 5.7 times greater than the 326% increase, in sterling terms, in the gold price over the same period. Since 2009, the fund has been managed by Evy Hambro, chief investment officer at Blackrock’s natural resources team.

Looking back on gold’s April fall, Hambro says: “It is always impossible for anyone to predict what gold will do in the short-term. The price fell in the face of strong fundamentals, driven by moves in the paper market, in other words, investors were shorting gold, and this helped to push the price down. An over-riding theme is the US economic recovery. When the dollar is weak gold is strong and vice versa and the recovery is pushing the price of the dollar back up. The price of gold today is only back to its April 2011 level at circa $1,400 per ounce.”

But Hambro believes the long-term story for bullion remains intact. He says: “The fundamental indicators are there. We are continuing to see demand from central governments and from the jewellery market. Overall we would expect prices to trend higher. But the stronger dollar, driven by the recovery in the US economy is a headwind.”

Hambro hit the headlines earlier this year, when he cautioned that gold mining firms were in danger of becoming a “barbarous relic” to equity investors unless they returned more money to shareholders. His argument was that he felt it was critical gold companies are able to translate high gold prices into better returns for shareholders, either through dividends or through re-investment that increases the quality of their overall asset base; ideally both.

But those companies which have delivered, which have re-invested cash flows into high returning projects, have shown capital discipline and returned excess cashflows to shareholders have achieved strong outperformance; the problem is that they have been few and far between notes Hambro.

He adds: “After pressure from shareholders, the industry has taken responsibility for the poor decisions made in previous years and over the last twelve months we have seen the top executives of most of the major gold mining companies replaced.

“We are in the early days of mining companies changing the way they behave but the signs are encouraging,” he says. Such positive developments can be seen in the likes of the FTSE 100 listed Randgold Resources, one of Hambro’s top holdings in the fund, which has upped its dividend per share from 20 cents in 2011 to 50 cents in 2013. Goldcorp, another constituent of his portfolio, has increased its monthly dividend from 3.5 to 4.5 cents a month, going up to 5 cents in 2013.

Hambro’s fund is circa 75% exposed to gold but he also has investments in other precious and industrial metals, including silver, platinum and copper. Industrial metals in some areas have suffered as a result of the growth contraction in China, as one of the of the world’s largest consumers of such commodities, when its orders pull back, the price of metals typically follow.

He says: “Our view is around company profitability and some firms, including aluminium smelters, currently have low levels of profitability, the same for zinc and nickel. The coal price has also been hit by the shale gas revolution in the US but copper producers have managed to remain profitable.”

Platinum, another of Hambro’s plays, is used for catalytic convertors, to reduce toxic emissions in diesel cars but Hambro, points out that diesel sales have not been as robust as gasoline vehicles. He says: “The US and China enjoy much more gasoline sales. But gasoline cars require palladium, the sister metal of platinum, so it is gaining a stronger demand.”

Many pundits have speculated for some time, at least until it hit a bump in April, on when the price of bullion will reach $2,000 an ounce. For his part, Hambro simply says: “Commodities are going to go up over time and we could see new highs, but I cannot predict when this will happen.”

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