Mark Dampier: This small, flexible fund could be a little gold mine

The Analyst

Owning gold used to be fraught with difficulty for retail investors. Transporting, securing and insuring the bullion added to the cost and hassle of ownership. Traditionally, investors bullish on gold therefore bought shares in gold mining companies. This had the added advantage of exposing investors to a gearing effect. As the gold bullion price rose companies that kept their costs stable could make increasing profits on each ounce of gold mined. Higher earnings and profits can eventually translate into a higher share price.

Over the past few years two things have caused this relationship to break down. As easily accessible gold has been exhausted, exploration and production costs have risen, along with associated costs such as machinery, raw materials and labour. Secondly, the rise of exchange-traded investments has enabled retail investors to access bullion – and other precious metals – easily and cheaply.

In 2011 gold bullion did what it was supposed to do. As Western governments devalued their currencies, the price rose as investors sought a safe haven in a store of value that cannot be devalued by printing more.

However, the shares of gold mining companies behaved like normal equities. Investors sold them almost indiscriminately when "risk off" was in vogue. In times of risk aversion investors tend to sell their winners first, so smaller gold miners, which had performed well, fared worst.

Smith & Williamson Global Gold & Resources, which tends to have abias towards smaller gold mining companies, did not escape the maelstrom.

Performance has rebounded recently, but not enough to make up for 2011's losses. With 62 per cent exposure to gold, 23 per cent in other precious metals and minerals, and 13 per cent in metals and mining, this is not a pure gold fund. It is run out of Toronto which is home to more than 60 per cent of the world's gold miners. This proximity to company management and key decision makers is a tremendous advantage.

Despite a poor 2011, the team remain positive on gold. Production is still flat with no signs of an increase in supply. Furthermore, geopolitical risk, particularly in Iran; currency debasement via further quantitative easing ; and demand from emerging markets could keep demand buoyant.

The Chinese, for example, are buying increasing amounts of gold, both at a government level to diversify their reserves away from US dollars, while retail investors and consumers are also adding to the global demand for bullion and jewellery.

Indeed, demand for gold jewellery remains strong in other emerging markets such as India, while central banks across the world continued to buy gold in 2011. Constrained supply and rising demand is a recipe for rising prices.

The catalysts are in place for the gold bullion price to keep rising over the longer term. This bodes well for the ability of gold mining companies to continue growing their profits.

In my view, gold mining shares are like a coiled spring. They are poised to rise and narrow the gap which emerged during 2011 between them and the price of bullion, although I wouldn't rule out more short-term volatility.

The Smith & Williamson team believe that gold mining companies are cheap, at much the same levels as they were during the depths of the 2008 financial crisis.

Mining companies are earning healthy profit margins, and larger ones, such as Newmont Mining, have started to link their dividends to the price of gold.

Investors therefore have the added benefit of receiving dividends as well as the potential for capital growth.

While absolute yields are not high, there could be potential for growth and I believe that this is a further reason to be positive.

Given all the uncertainties in the world I continue to believe that part of a diversified portfolio should be exposed to gold.

This fund is flexible, relatively small, and in my view it is worth considering.

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

Independent Partners; Do you need financial advice on your investments, pension or insurance? Book a free consultation with an independent Financial Adviser at VouchedFor.co.uk

Suggested Topics
Finacial products from our partners
Property search
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    Recruitment Genius: Sales Assistant / Buyer

    £15000 - £17000 per annum: Recruitment Genius: This company offers a range of ...

    Recruitment Genius: Customer Service Advisor

    £15000 - £16000 per annum: Recruitment Genius: Customer Service Advisors are r...

    SThree: Trainee Recruitment Consultant

    £20000 - £25000 per annum + OTE £45K: SThree: SThree were established in 1986....

    Recruitment Genius: Compliance Manager

    £40000 - £60000 per annum: Recruitment Genius: A Compliance Manager is require...

    Day In a Page

    Is this the future of flying: battery-powered planes made of plastic, and without flight decks?

    Is this the future of flying?

    Battery-powered planes made of plastic, and without flight decks
    Isis are barbarians – but the Caliphate is a dream at the heart of all Muslim traditions

    Isis are barbarians

    but the Caliphate is an ancient Muslim ideal
    The Brink's-Mat curse strikes again: three tons of stolen gold that brought only grief

    Curse of Brink's Mat strikes again

    Death of John 'Goldfinger' Palmer the latest killing related to 1983 heist
    Greece debt crisis: 'The ministers talk to us about miracles' – why Greeks are cynical ahead of the bailout referendum

    'The ministers talk to us about miracles'

    Why Greeks are cynical ahead of the bailout referendum
    Call of the wild: How science is learning to decode the way animals communicate

    Call of the wild

    How science is learning to decode the way animals communicate
    Greece debt crisis: What happened to democracy when it’s a case of 'Vote Yes or else'?

    'The economic collapse has happened. What is at risk now is democracy...'

    If it doesn’t work in Europe, how is it supposed to work in India or the Middle East, asks Robert Fisk
    The science of swearing: What lies behind the use of four-letter words?

    The science of swearing

    What lies behind the use of four-letter words?
    The Real Stories of Migrant Britain: Clive fled from Zimbabwe - now it won't have him back

    The Real Stories of Migrant Britain

    Clive fled from Zimbabwe - now it won’t have him back
    Africa on the menu: Three foodie friends want to popularise dishes from the continent

    Africa on the menu

    Three foodie friends want to popularise dishes from the hot new continent
    Donna Karan is stepping down after 30 years - so who will fill the DKNY creator's boots?

    Who will fill Donna Karan's boots?

    The designer is stepping down as Chief Designer of DKNY after 30 years. Alexander Fury looks back at the career of 'America's Chanel'
    10 best statement lightbulbs

    10 best statement lightbulbs

    Dare to bare with some out-of-the-ordinary illumination
    Wimbledon 2015: Heather Watson - 'I had Serena's poster on my wall – now I'm playing her'

    Heather Watson: 'I had Serena's poster on my wall – now I'm playing her'

    Briton pumped up for dream meeting with world No 1
    Wimbledon 2015: Nick Bollettieri - It's time for big John Isner to produce the goods to go with his thumping serve

    Nick Bollettieri's Wimbledon Files

    It's time for big John Isner to produce the goods to go with his thumping serve
    Dustin Brown: Who is the tennis player who knocked Rafael Nadal out of Wimbeldon 2015?

    Dustin Brown

    Who is the German player that knocked Nadal out of Wimbeldon 2015?
    Ashes 2015: Damien Martyn - 'England are fired up again, just like in 2005...'

    Damien Martyn: 'England are fired up again, just like in 2005...'

    Australian veteran of that Ashes series, believes the hosts' may become unstoppable if they win the first Test