View from City Road: Gold may not be such a dazzler

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The Independent Online
Julian Baring has found out the hard way that not all publicity is good publicity. In November he presided over what was dubbed 'the most successful investment trust launch ever', that of the Mercury World Mining Trust.

Given that the fund raised more than pounds 425m when it had been aiming for only about pounds 50m shortly beforehand, the hyperbole was understandable.

Unfortunately for Mr Baring, the size of the fund also caught the eye of the market: long before he could translate the cash into investments in gold and other mining shares, the speculators had snapped up the likely candidates.

These are illiquid markets easily shifted by relatively small amounts of money. Ergo Mr Baring had to buy at the top of a spike and watch glumly as others took their profits. Rather bravely, however, he has now made himself a hostage to fortune, declaring that the real test of the fund will be its performance over the next six months.

Whether he succeeds in dazzling investors with another performance like the 267 per cent increase in five years that he engineered with Mercury's Gold and General Fund will primarily depend on the gold price - around 37 per cent of the fund is invested in gold or gold shares.

Mr Baring - a gold bug of much longer standing than the ubiquitous George Soros - talks of possible peaks of dollars 500 an ounce on the basis that the metal is at the bottom of its cycle and will rise as global economies improve.

Yet while demand for gold for jewellery and the like will probably outstrip supply by 200-300 tonnes this year, central banks are sitting on around 35,000 tonnes of the stuff, which they look increasingly prepared to sell.

That is one of the reasons why the peaks and troughs of the gold price have slowly but surely grown less dramatic since the heady days of the late 1970s when gold reached more than dollars 800 an ounce.

Even if Mr Baring is right, however, the size of the fund - and hence the investments it has had to make - creates problems. Cashing in big stakes in illiquid investments may prove much trickier to finesse than was the case with smaller holdings. Bigger, as they say, is not always better.

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