The price of gold has been trending lower and is now trading at less than $1,100 per ounce, which is close to a six year low. One of the main reasons is the growing likelihood of an increase in US interest rates that has driven the dollar higher. The strong currency makes the dollar denominated commodity more expensive for non US investors and forces the price lower to compensate.
It is the gold mining companies that have been the biggest casualties with their share prices suffering heavy falls, but there could now be a golden opportunity to pick up a real bargain. The current price of gold is close to the marginal cost of production for many of these operations so even a small increase would have a dramatically beneficial impact on their profitability.
There is a good chance that the share prices would react very positively to an increase in the price of gold because it would make their businesses that much more viable. That is why the shares tend to provide a geared exposure to the underlying spot price and offer the greater upside potential albeit with more volatility.
Ben Conway, one of the managers of the PFS Hawksmoor Vanbrugh fund of funds, has recently increased his exposure to this area by buying CF Ruffer Gold. This is an open-ended fund that aims to provide long-term capital growth by investing in gold and precious metal related companies, but it has had a difficult time along with the rest of the sector. Over the last five years it is down almost 75% with the manager sticking to his core holdings with names such as Silver Wheaton, Regis Resources and Northern Star Resources.
Other similar funds include Investec Global Gold, BlackRock Gold & General, and Smith & Williamson Global Gold and Resources.
Another option would be to invest in one of the specialist closed-ended funds like Golden Prospect that trades in London under the ticker GPM. The tiny £11m fund invests in shares in the precious metals sector, but it has had a tough time with a five-year loss of 80%.
Golden Prospect’s managers have put together a concentrated portfolio of 32 stocks and two bonds with the top ten holdings accounting for 58% of the assets. These include the likes of Fresnillo, Klondex Mines, Goldcorp and Silver Wheaton. The fund is currently trading at a discount to NAV of 8.7%.
If you are willing to accept even more risk you could invest in MFM Junior Gold, an open-ended fund that holds a portfolio of small and medium-sized gold mining companies. It was created on 1st September 2009 with the shares down 78% since the launch, which probably explains why it only has £5.9m in assets under management.
There are differing views on what will happen next. A Canadian-based fund manager, Randall Abraham, has recently gone on record as saying that gold will recover to $1,400 per ounce inside 12 months as that is where it needs to be to balance supply and demand. Others are more bearish and don’t expect it to make any headway in the current low growth, low inflation environment.
Specialist gold mining funds all have to be regarded as high risk, even at these depressed valuations, and they should only form a small part of your portfolio. There could be further downside if the gold price falls any further and they are bound to be highly volatile, but if you are comfortable with this there is a huge amount of upside potential.