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Investment matters – Bullion for you

A $1,000 gold price may have looked to be an optimistic forecast not long ago but today it seems close to reality.

Gold hit a record high price of more than $900 an ounce earlier this month and while it has since fallen back, there are those insistent it has further to climb before its bull run is over.

Much has been written over the past few years about the bull run in commodities.

The price of gold increased by 24 per cent in 2003, 16 per cent in 2004, 21 per cent in 2005, 26 per cent in 2006 and 31 per cent in 2007. If the metal does reach $1,000 this year, that would represent a further 19 per cent increase.

Among those betting on a continued high price for the precious metal are US analysts at Goldman Sachs, who in mid-January revised their price targets to $915, up from its earlier forecast of $800.

Forecasts on the gold price – and the price of oil – over the coming months may vary but there are some consistent reasons why analysts and fund managers are bullish on gold and commodities in general.

Barclays Capital was reported as looking at a $900 gold price for the first quarter, rising to $910 by the second quarter.

It, along with other analysts, believes there is potential that bullion could reach $1,000 at some point this year. Demand is said to be based on growing uncertainty over the US economy and a weak dollar.

Daniel Sacks, fund manager of Investec’s Guernsey-based global gold fund, believes there is capacity for a sustained high gold price. He stops short of predicting an exact number but says there is definitely scope for it to be a four-figure number.

Sacks notes that the key elements to support a high gold price are in place and unlikely to change any time soon.

“The macro situation for gold is good,” he notes, pointing to signs of rising global inflation, falling interest rates and a weak dollar – to which gold is negatively correlated.

On the supply side, gold producers are not exactly finding big pockets gold, with many resorting to mining lower-grade quality gold – meaning the market is not likely to be flooded any time soon.

It all spells a good environment for a high price. Sacks points out that gold is predominantly used for jewellery and for investment purposes, meaning there are few substitutes. “The price of gold can go very high because it is not used for anything – there is no demand destruction that you see in other metals,” he says, pointing out that typically when a metal price gets too high, the market starts to search for cheaper alternatives. With gold, there is no such substitute as its uses are so limited. Seen as a defensive stance, gold is likely to do well as investors become nervous about the state of the US economy and the threat of a recession.

Investors have a few options in getting exposure. There are exchange traded funds, which offer a low-cost exposure to the price of bullion.

Sacks, who holds a 6 per cent weighting to gold ETFs in his fund, points out that the size and popularity of metal ETFs mean that they have become a whole new source of demand for gold.

Nik Bienkowski, head of research at ETF Securities, says ETF has seen record growth in its commodity-linked ETFs over the past five weeks – particularly those linked to precious metals.

He says: “We are seeing continued record growth across all commodities but particularly across precious metals and agriculture. Industry fundamentals remain positive for most commodities but continued equity market volatility combined with economic uncertainty regarding inflation and growth are proving to be positive for many commodities.

“It is during these times that commodities and precious metals have tended to outperform, particularly given gold’s safe-haven status.”

For UK investors, there are also a few open-ended funds – some new and some which have been around for quite some time. Performancewise, gold funds have certainly been drawing attention.

Over the 12 months to January 17, one of the older gold funds available in the UK retail sector – the £1.3bn Merrill Lynch gold & general fund (launched in 1988) – is the top-performing open-ended fund out of the 2,000-plus onshore funds, having posted gains of 60.8 per cent, according to Trustnet figures.

Resources funds are another way of gaining exposure to the high price and also feature exposure to other commodities.

A gold fund may take the top spot over the past 12 months in performance terms but two resources portfolios are also featured among the top 10 over the past year while over five years, JP Natural Resources is ranked number two, with gains of over 430 per cent.

In addition to these specialist vehicles, it is worth having a look at more mainstream portfolios to see what fund managers are doing about the upward momentum behind gold. For instance, F&C’s Ted Scott says he has been adding gold as a hedge against inflation. He is cautious on mining stocks in general and avoiding base metals but says he has added some positions in precious metal stocks to the F&C UK growth & income fund, including Lonmin and a basket of small gold miners.

A quick glance through the factsheets of some other more mainstream portfolios reveals that gold mining firm Avocet is in the top 10 of the Artemis’ UK growth portfolio and Invesco Perpetual’s UK growth fund has First Quantum Minerals (which looks at copper as well as gold) among its biggest positions.

But just because some funds are featuring mining exposure does not mean they are exposed to gold. Many have been playing the general rise in commodities and metals through mining stocks and are more exposed to the performance of other metals such as copper.

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