Mark Dampier: Mines a rich seam as gold looks set to keep its glow
Saturday 07 January 2012
Last year was a volatile one for the gold price. It reached a high of more than $1,900 per ounce in September but fell back to less than $1,600. Over the course of the year it was up 8 per cent. The recent falls seem to be caused by concerns about eurozone debt returning to the fore. You would think the eurozone crisis would be positive for gold as it is often regarded as a safe haven in times of market turmoil. Furthermore, I believe it will lead to quantitative easing in Europe, essentially the printing of new money which serves to devalue the currency. This should increase demand for gold as a store of value which cannot be debased by governments and central banks.
Investors, however, have decided to take short-term refuge in the US dollar, somewhat ironic given the longer-term challenges facing the US. It would seem the eurozone crisis has instead created the need for investors to have additional liquidity, and because gold is easy to sell it has seen the same flight to cash that risk assets have suffered.
In my view the attractions of gold remain undiminished, and for this reason I believe the fall back in price will be temporary. It could therefore present a buying opportunity for those wanting exposure. Buying physical gold or an exchange-traded fund is one way to build exposure, but a more risky (and potentially more rewarding) way is shares in gold mining companies. A pronounced gap opened up between the price of gold bullion and gold mining shares in 2011.
While the gold price appreciated overall, gold mining funds fared far worse with BlackRock Gold & General down 18.5 per cent and Smith & Williamson Global Gold & Resources off 27 per cent. Gold equities seemed not to go up much when the gold price rose but caught the full brunt of the metal's falls.
While gold itself is seen as a safe-haven asset (though I use that phrase cautiously), mining shares are seen as much riskier. When markets become risk averse the gold price often rises, but this doesn't necessarily translate into gains for gold mining shares. I don't believe this disconnect can exist over the longer term, though. A higher gold price means greater profits for miners, and in the long run higher gold mining profits should mean higher share prices in the sector. Indeed many are now able to reward their shareholders with dividends. Newmont Mining, for instance, has linked its dividend to the gold price and others may follow suit. It could attract more investors to gold mining companies.
Holders of funds such as BlackRock Gold & General have been disappointed by the fall in the price over 2011. I share that disappointment, being a holder of BlackRock. Yet I don't believe the fundamentals for gold have changed. We have negative real interest rates around the world combined with a debt crisis in the West. These conditions are likely to persist. It is hard to see central banks pushing interest rates up significantly in the next two years, and in Europe they could even fall further.
Evy Hambro, the manager of BlackRock Gold & General, is more bullish on prospects for his fund than I can remember. He compares gold equities to a "coiled spring" ready to bounce back strongly. Cynics will conclude, "Well he would say that wouldn't he?" Yet he has nothing to gain in terms of his long-term reputation by making statements like this without truly believing them. Given the price action over the past 12 months I am inclined to agree with him that a significant opportunity is presenting itself. However, gold remains a volatile asset class, and the shares of gold miners more so. Therefore investors shouldn't allocate more than around 5 per cent of their portfolio to this specialised area.
Mark Dampier is head of research at Hargreaves Lansdown, the asset manager, financial adviser and stockbroker. For more details about the funds included in this column, visit www.h-l.co.uk/independent
Compare with the Independent: See how much you could save by switching credit cards. Compare now
Pensioners to be told how long they have left to live to help them plan their finances
Garden city in Ebbsfleet, Kent not enough to solve housing crisis in UK
Should I delay retiring because of the Budget?
How to start your own internet business
Bargain Hunter: The Easter holidays offer some sweet surprises from Playmobil
- 1 Poveglia: 'World's most haunted island' up for sale...is anyone brave enough to buy it?
- 2 The Hobbit: There and Back Again set for possible title change
- 3 Video of British Muslims dancing to Pharrell Williams's hit Happy attacked as 'sinful'
- 4 24 people applied for the 'world's toughest job', here are their interviews
- 5 Andre Johnson: Wu-Tang Clan-discovered rapper severed his penis and jumped from LA building
The food poverty scandal that shames Britain: Nearly 1m people rely on handouts to eat – and benefit reforms may be to blame
US Navy christens huge $3 billion destroyer ship USS Zumwalt that appears as a fishing boat on enemy radar
Scottish independence: It is the English who should be on their knees, begging the Scots to vote ‘No’
Nigel Farage fatigue? Half of voters ‘immune’ to Ukip’s appeal
Nigel Farage on Have I Got News For You: Ukip leader ridiculed over expenses and party 'fruitcakes'
Nigel Farage: I’m taking on the status quo, and the Establishment’s fighting back
iJobs Money & Business
£150.00 per week: QA Apprenticeships: This company has been providing on site ...
£221.25 per week: QA Apprenticeships: This company is a well established Inter...
£40000 - £50000 per annum: Harrington Starr: Client Relationship Manager - SQL...
£35000 - £50000 per annum: Pro-Recruitment Group: Take your chance to join the...
Day In a Page
Chapel House is a former vicarage with nine bedrooms in the beautiful Upper Wye Valley
A five-bedroom B&B and separate owner's accomodation with potential for conversion
Enjoy summer by the Thames in this two double-bedroom converted warehouse in Rotherhithe village
A one-bedroom, luxury apartment with private gym and concierge service in Moorgate
A four-bedroom house in Hermitage Gardens with three reception rooms and landscaped gardens
A seven-bedroom Grade II-listed property with a separate self-contained apartment
A five-bedroom Victorian house with three reception rooms and galleried landing, £695,000
A six-bedroom farmhouse with five acres of land in a former cloth-making village
A secluded seven-bedroom detached house with large private garden, £490,000
A three-bedroom cottage overlooking Sarratt village green with open fires and solid oak floors
A three-bedroom maisonette flat in a Grade I-listed, Georgian townhouse in a sought-after location
A one-bedroom apartment located within a private gated development, north of Turnham Green
Look forward to a brighter future at two-bedroom Sunny Cottages, ideal for Londoners looking to downsize
A three-bedroom red-brick cottage with outbuildings and pretty gardens, £200,000
This three-bedroom flat within a former textile factory spans the corner of the fourth floor and has a balcony
A charming four-bedroom Oxfordshire cottage with oak floors and chunky-beamed ceilings, £465,000
A beautiful one-bed flat in a sought-after portered block, with access to Norland Square communal gardens
A one-bedroom flat within a Sixties school conversion with high-spec design and open-plan kitchen, close to Lambeth North Tube, £435,000
A 17th century four-bedroom house, with open fireplaces, cellar and pool, £600,000
A three-bedroom, coach house with luxury open-plan living space and contemporary breakfast bar
A newly refurbished one-bedroom flat in the heart of Mayfair, close to Grosvenor Square
A charming four-bedroom house overlooking Burleigh Square Park, close to Thorpe Bay
A three-bedroom farmhouse with a large inglenook fireplace and exposed beams
A boutique mews house, set around a central courtyard, with three bedrooms and a private roof terrace
A four-bedroom farm-conversion with three bathrooms and two reception rooms
A two-bedroom detached house with ensuite bathrooms and a sun-drenched decked terrace, £750,000
A modern and spacious two-bedroom, penthouse flat with two bathrooms in a prestigious development
A beautifully renovated five-bedroom terrace with three reception rooms and a courtyard garden, £700,000
A four-bedroom period house which has been extended to provide almost 2,500sq ft of living space, £675,000
A pretty three-bedroom Georgian home with a 22ft drawing room and a master suite with a balcony, £525,000
A substanstial family home with five bedrooms and landscaped gardens in the much sought-after Branksome Park area
A well-presented three-bedroom house with front and rear gardens, close to White City station, £475,000
A handsome five-bedroom house in a sought-after location close to the city centre
A five-bedroom country home with valley views, equestrian stables and 27 acres of land, £725,000
A six-bedroom farm house with separate, detached cottages and 371 acres of land
A two-bedroom cottage with parquet floors, chunky beams and an open fireplace
A three-bedrrom flat with 2,733sq feet of living space, a beautiful private garden and 15 acres of communal grounds