THE INVESTMENT COLUMN : Waiting for gold to glitter again

Click to follow
The Independent Online
In the investment world there is nothing worse than a stale bull justifying adisappointing performance with forecasts of imminent recovery. Gold bugs have been doing it for years, predicting a dramatic breakout in the bullion price since the early Eighties, when the metal briefly approached $1,000 an ounce.

Since those heady days, when it looked as if the world economy was heading into simultaneous slump and hyper-inflation, the gold price has trended downwards or sideways, although there was a brief surge in 1993 when George Soros and James Goldsmith were reported to be big buyers.

It came to nothing and the price has been confined in a narrow range between $350 and $370 an ounce this year. Yet the World Gold Council confidently predicts that world demand will reach a record 3,250 tonnes this year, far in excess of new mine supply, leaving the market dependent on supplies of scrap gold and sales by central banks.

Another reason for optimism is the response of South African mining houses to an only marginally profitable year, which traditionally is to sell gold forward and borrow metal from central banks to meet their contracts. The bullion market went into a brief flurry recently when some central banks decided to scale down the amounts of gold they were willing to supply to the market to cover those sales.

But the most exciting event in the bullion market has been the recent forecast that the world's main monetary authorities will resume regular auctions of gold reserves. That could drive down the price by $50, at which point, the theory goes, gold would be such a bargain that every woman in India would go out and buy another bangle, triggering the long- awaited surge in gold prices. It is hardly a flawless argument.

For UK private investors, if they buy that line, the main exposure to the gold market is not physical metal, coins, or even individual gold mining shares, but the six or eight specialist unit trusts that invest in gold mining shares and exploration stocks. Gold trusts are traditionally very volatile and pay only modest dividends. Over the last three years, however, they have outperformed most other funds.

Save & Prosper's Gold and Exploration Fund, for example, claims 30 per cent compound growth over three years. This year, however, gold funds have underperformed the market. S&P is down 8 per cent since the start of the year, and Old Mutual is in the process of winding up its small Gold Trust. But hope springs eternal and over the next 12 months S&P's Gold and Exploration could outperform general trusts based on stock markets, which are looking increasingly fully valued.

Litigation no threat to BAT

When a state such as Massachusetts threatens litigation against your company it is not something to be brushed aside lightly. Especially when it is the latest in a string of governments to try and recoup some of the enormous health-care costs inflicted by smoking.

If some of the statistics relating to the evil weed are to be believed, however, it will take more than a vague threat of legal action to unsettle BAT. Litigation risk is not a new phenomenon in the tobacco industry, particulary in the US, where there have been more than 400 product liability suits since the 1950s with no material success for the plaintiffs.

With its combination of tobacco's cash flow and financial services, the company's position as one of Britain's top 10 businesses looks assured and its handsome yield remains highly attractive.

Whether you like it or not, the world market for cigarettes is growing as new markets make up for the decline in the mature regions where smoking is fast becoming a pariah activity.

A staggering 100 billion cigarettes are sold around the world every week, 5,300 billion a year. Since 1980, the number has grown by almost 1,000 billion. The scope for growth continues to be enormous, with Philip Morris and BAT controlling less than 25 per cent of the world market.

BAT sells about a tenth of the world's cigarettes, in almost 200 countries, with manufacturing operations in more than 50. And its presence is growing - a year ago it made what is seen to have been a well timed and sensibly priced acquisition of American Tobacco for US$1bn. Along with Philip Morris, RJ Reynolds and Rothmans it is one of only four genuinely international manufacturers and has the stability of real geographical diversity.

Against this background it is perhaps hardly surprising that BAT's shares edged up 10p to 554p yesterday. On the basis of pre-tax profits of pounds 2.33bn in the year to December, the market consensus, the shares stand on a prospective price/earnings ratio of 12. More importantly, they yield 5.4 per cent and still look good value.

Inchcape adds uncertainty

Inchcape's announcement that it is to float its Bain Hogg insurance subsidiary rather than sell it does not take the embattled car distributor far forward. A float has been the intention since the company bought the Hogg business last year to merge it with its Bain Clarksons business. A sale might have been tempting if the right offer had come along but it plainly hasn't.

Inchcape said yesterday that a number of proposals had been received but not at the pounds 400m the company has pinned its hopes on. That figure looks over-optimistic as most analysts value Bain at pounds 240m-pounds 260m.

Given the low ratings attached to insurance companies, the Bain flotation is unlikely to take place until 1997. So if anything yesterday's announcement adds uncertainty rather than removes it. It also makes a cut in the dividend more likely. The company must now concentrate on trying to restructure the group, which suffered a miserable year. With its Japanese car distributorship hammered by the high yen, the company's shares have slumped from around 430p at the beginning of the year to just 234p now, up 4p yesterday. The indignity was compounded when Inchcape was removed from the FT-SE 100 earlier this month.

The company is concentrating on a restructure that involves cost-cutting and the disposal of loss-making businesses. It is also trying to protect itself from the vagaries of the yen by building up its distribution of non-Japanese cars such as Jaguar and Volvo.

However, what Inchcape really needs to hoist itself out of the mire is an improvement in external factors such as a weakening of the yen or a healthier European car market. Inchcape shareholders have been badly bruised by the company's dire performance this year, but with analysts forecasting profits of pounds 140m this year (down from pounds 228m) it could be a long haul. On a forward rating of 15, the shares are still not cheap.