Blackrock Gold & General - rush to safety causes sharp spike in gold price

Heather Ferguson | Thu 24 March 2016

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What has caused the gold price to rise?

Stock markets have been volatile so far this year and when investors are uncertain, they often increase exposure to assets perceived as low-risk, such as cash and gold. Ultra-low interest rates, and even negative rates in some countries, has reduced the appeal of holding cash recently, increasing the potential attractiveness of gold. The expectation that the US will raise interest rates at a slower rate than initially anticipated, or that they might be forced to reverse December's interest rate rise, has also strengthened the case for holding gold.

What's been the impact on gold mining companies?

Since the turn of the year, the share prices of gold mining companies have risen strongly. After a difficult few years for the sector some have successfully cut costs in recent years and investors expect the higher gold price to feed through to greater profits on each ounce of gold produced.

Those already extracting gold from the ground, rather than those reliant purely on finding new reserves, and with the capacity to grow production while keeping costs low, are likely to benefit most over the longer term, according to Evy Hambro, manager of the BlackRock Gold & General Fund. Low-cost producers are usually companies with new pits, as the highest quality and most accessible ore is usually mined first.

In the shorter term, lower-quality companies (with high debt, high costs or poor reserves), have performed better than their higher-quality counterparts. In recent years their share prices have dropped considerably on bankruptcy concerns, but a higher gold price has relieved some pressure.

How has the BlackRock Gold & General Fund performed?

Since the beginning of the year the fund has risen 40.4%, significantly outperforming the 12.2% rise in the gold price, but underperforming the FTSE Gold Mines Index which rose 47.3%* over the same period. Past performance should not be seen as a guide to future returns. The fund has underperformed in the short term due to some non-gold investments such as silver and diamonds. The manager also focuses on high-quality businesses with established mines and strong balance sheets, which have lagged their lower-quality counterparts in the recent rally.

However, exposure to higher-quality companies has aided performance over the longer term. Evy Hambro has been involved with the team since 1994 and has managed the Blackrock Gold & General Fund since April 2009. Over his tenure, the fund has fallen 25.1% compared with a loss of 45.8% for the FTSE Gold Mines Index and a gain of 38.7% for the gold price.

Performance of the Blackrock Gold & General Fund over manager's tenure

Source: Lipper IM, correct at 01/03/2016

Source: Lipper IM to *01/03/2016. Past performance is not a guide to future returns.

While there is some link between the gold price and the fortunes of gold mining companies the performance of the latter in recent years has highlighted their increased risks. Mining companies are affected by a range of factors in addition to the price of gold, including management decisions and the costs associated with finding and producing gold. Many companies let costs spiral in recent years and squandered the benefit of a higher gold price.

The team's outlook

Short term: gold mining companies could be subject to profit taking following this period of strong performance, which could negatively affect share prices.

Medium term: investors often hold gold when the value of cash is being eroded by inflation, and inflation is likely to become more of an issue as the economy continues to recover. Elsewhere, demand from Asia will continue to support the gold price, in their view. As demand for gold grows, so does the price, resulting in higher profit margins for mining companies able to control costs.

Long term: it is likely investors will always view gold as a long term store of wealth. However, a limited supply of gold and a lack of investment in new mines in recent years could lead to reduced supply of the precious metal in a few years. This could drive the gold price higher over the long term and underpins the manager's positive long-term outlook.

Our view on this fund

All funds investing in this adventurous sector have suffered in recent years. Although this fund has lost money, over the manager's tenure it has fallen to a lesser degree than the FTSE Gold Mines Index.

The BlackRock team is experienced and well-resourced and their long-term track record is strong. A focus on high-quality mining companies has helped the fund shelter investors from the worst of share price falls. They have tended to suffer less than their lower-quality counterparts in periods of a weak gold price, while capturing much of the benefits of a rising gold price.

Over the longer term, exposure to other precious metals such as silver has also helped provide some shelter when gold mining shares have fallen sharply, although this is not a guide as to how the fund will perform in future.

This is a specialised fund with exposure to emerging markets and smaller company shares, both of which increase risk. Gold could continue to do well if stock markets remain volatile. However, we would only ever suggest allocating a small portion of a portfolio to such a high-risk sector. We are confident the fund manager will add value for investors over the long term and the fund retains its place on the Wealth 150 list of our favourite funds across the major sectors.

Please note the portfolio is relatively concentrated which allows each holding to have a significant impact on performance although this is a higher-risk approach.

Find out more about this fund including how to invest

Please read the key features/key investor information document in addition to the information above.