Regular readers will know that I am keen on commodities. This view is based in the main on growth in emerging markets, especially China and India. Of course, as with any long cycle, there are setbacks along the way so don't expect it to be a one-way bet.
The present credit crisis we are seeing in the West is caused by some atrocious lending practices from American banks, and it is leading to a dramatic slowdown in economic activity on both sides of the Atlantic. However, it has not yet brought the commodity story to an end.
Demand for many commodities from the emerging-market countries remains extremely strong, and is unlikely to be derailed by a US recession. In fact, the problems we are seeing in the developed world are just the kind of thing that gold investors in particular like to see.
The gold price has made steady progress from the lows that we saw when (with typically astute judgement) Gordon Brown sold half our gold reserves for a mere $260 (£129) an ounce. Recently, the price has been threatening to break through the $1,000 per ounce barrier. On an inflation-adjusted basis this is still a long way off its record high, which would be $2,500 per ounce in today's terms – so the gold bulls will feel there could be plenty more growth to come.
Gold remains a beneficiary of a weak dollar, rising global inflation and geopolitical worries. It is an ultimate store of value and, unlike currencies and bonds, governments can't just conjure up more gold whenever they want some.
In spite of the gold price moving up, there are in fact very few managed funds from which investors can choose. A relatively new name is the Investec Global Gold Fund, which is a copy of an offshore fund they have been running since 1990 – the chart below shows the performance of the offshore fund.
The fund is run out of South Africa by Daniel Sacks, who has been with Investec for 10 years, and it is co-managed by Gail Daniel, Investec's head of equities in South Africa.
It seems appropriate that it should be run from South Africa, firstly because three of the five major gold companies are listed in South Africa, and secondly, this fund also invests money in platinum, and the world's four largest platinum mines are in South Africa.
In fact, one-third of the fund can be invested in non-gold precious metals, and here platinum has been a huge success for the fund – 80 per cent of platinum comes from South Africa and it is used in making catalytic converters. The fact that prices of both platinum and gold have spiked recently is in part due to supply problems caused by repeated power shortages in South Africa.
The arguments for investing in gold, apart from the ones I have already mentioned, are its diversification properties – in other words, the low correlation of its price movements with stock markets. However, the most important factor is the very tight supply/demand position. Simply put, 2007's supply of gold, of about 3,800 tons, was less than total demand, which came in at about 3,890 tons. It is a similar story with platinum. Mine production is actually falling, so new supply is not meeting new demand and prices are being driven up.
There are about 100 stocks in the world from which the fund can choose. The manager holds about 30 at any one time, and can invest up to 10 per cent of the fund in any one share. In fact, he is close to this limit now and is heavily invested in Kinross Gold, a Canadian company that operates nine gold mines around the world.
For Daniel Sacks and the team, the most important thing when analysing a share is not its valuation (as all mining stocks tend to be expensive), but its earnings momentum. They want to invest in companies that are seeing earnings upgrades and will sell (again, regardless of valuation) if a company's earnings forecasts start to be downgraded. So the investment process is very different in this specialist area to the approach you would get from a more generalist fund manager.
In my opinion, there is a place for a gold fund in most portfolios. It clearly has the potential to be a volatile investment, but in today's uncertain economic climate it is one of the few areas that I can pick to rise with any degree of confidence.
As yet, the Investec Global Gold Fund is not on my Wealth 150 list of favourite funds, but it is worth considering alongside more established funds such as BlackRock Merrill Lynch Gold & General when choosing a gold fund to be part of your portfolio.
Mark Dampier is the head of research at Hargreaves Lansdown, the asset manager, financial adviser and stockbroker. For more information about the funds included in this column, visit www.h-l.co.uk/independentReuse content