BlackRock’s Catherine Raw outlines reasons to own gold

Financial markets so far this year have been rife with distress, confusion and occasional glimmers of hope in an increasingly volatile environment, notes Catherine Raw, portfolio manager with the BlackRock Natural Resources team.

Gold had until recently provided some respite for investors as the price of the yellow metal rose to over $1,900/oz in early September. However in the falls seen across financial markets in mid-September, not even gold was immune. The gold price briefly touched a low of $1,533/oz but quickly rebounded and seems to have established a floor at over $1,600/oz.

The reasons to own gold have not changed – it remains a portfolio diversifier and with paper currencies continuing to be burdened by ever-growing mountains of debt, holding gold as a hedge against the future value of these currencies remains as true as ever. Gold has historically performed well in a variety of economic environments but one that stands out is the returns during periods of negative real interest rates – when inflation is greater than interest rates. Given that the US Federal Open Market Committee (FOMC) announced they expect exceptionally low interest rates to remain until at least mid-2013 due to the economic malaise in the US, the outlook for gold looks positive.

Gold investors have certainly been some of the best positioned so far this year as the price of the yellow metal has risen to over $1,600/oz from $1,400/oz at the end of 2010. However holders of gold shares have been left feeling short-changed as the sector has risen only a couple of percent, dramatically lagging the price of the underlying metal. Given the direct link between the gold price and company earnings, this has been surprising. Is this because we are in a world of zero margin expansion?

No – the gold price year to date has averaged $300/oz (25%) higher than in 2010 and despite cost pressures from labour costs, stronger emerging market currencies and raw material inflation, the research firm GFMS reported that the average cash and total costs in H1 2011 rose by only $75/oz. There will be exceptions where companies have been unable to control costs but the higher quality producers that are held in the fund are set to report record earnings yet again in the third quarter. The strongest message that gold company management can deliver in this gold price environment is to signal a paradigm shift in the attitude towards dividends.

Gold equities have yet to price in the current gold price level and on many valuation metrics are trading close to historic lows. Given the underperformance of gold equities, the attractive valuations at which they are trading and the robust outlook for gold itself, the stage is set for gold companies to shine.


Catherine Raw is a portfolio manager with the BlackRock Natural Resources team.

This article was first published on Professional Adviser Hong Kong

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