Gold has emerged as one of the few winners from the financial crisis. Turbulence across markets globally and returns of next to nothing on cash over the past two years saw investors pour money into bullion. As a result, the gold price soared and Evy Hambro's BlackRock Gold & General fund saw inflows of nearly £1.5bn in the past 24 months alone, bolstering the fund to £3.4bn.
What is your current market outlook?
The year has started with moderately more appetite for risk across markets. However, there will no doubt be many twists and turns in the coming months and gold appears attractive as a hedge against many of these potential pot holes. The reasons for owning gold, therefore – as an alternative store of value, an alternative currency, a potential safeguard against inflation, a source of diversification – appear as relevant now as they did throughout much of 2011. Moreover, a negative real interest rate environment, such as the one most major economies are in and which looks set to persist, is typically an accommodative one for gold.
What's next for the gold price?
Long-term fundamentals in the gold market appear supportive of prices, driven by constrained supply and rising demand. Gold mine supply was effectively flat from 2001 to 2010, despite the huge increase in the gold price over that period, as falling discovery rates and grades created, among other factors, significant challenges to production growth. Mine production expanded by 3.8pc in 2011, but set against a gold price which averaged 28pc higher in 2011 than in 2010 that is a modest figure. Constraints on increasing this production base further remain, one of which is the relative lack of exploration success for gold. Central bank activity has also been a noteworthy contributor to gold's strength and to the supportive outlook for the metal: last year central banks bought more gold than in any year since 1964.
Over the past two years, the official sector has reversed a steady selling pattern into a buying one – in 2010 net purchases from central banks stood at 77 tons, in 2011 that figure rose to 440 tons. This is a highly supportive trend for gold demand and one that has some longevity in our view.
Would you buy gold now?
Absolutely, I would buy gold at almost any price – as long as the fundamentals are strong. Gold has been incredibly strong for most of the past 10 years, and I see that trend continuing. It is easy to look at the gold price and say well it used to be $250 an ounce and now it's $1,700 an ounce, but the costs involved in mining gold have increased. You have to look at the relative margin. If costs were still low but the price was high then I would view it as expensive and unsustainable.
Commodities prices should be viewed relatively and gold is no exception to that.
Will gold equities catch up with physical gold?
Gold equities lacked gold's lustre in 2011 and underperformed the metal by a margin – bullion finished the year up by 11pc, whereas gold equities fell by 16pc. The miners were dragged lower by the broader economic and market malaise last year. As a result, gold equities are trading at attractive valuations on a number of metrics. Margin expansion in the gold mining industry has enabled companies to deliver record earnings over recent results. Free cash-flow levels are high and dividends are beginning to be increased. As such, gold equities appear poised for a potential re-rating.
Equities have started to catch up; they were at the bottom in terms of relative performance in October last year, but they have been outperforming bullion since. Whether this is the start of a reversal I am not sure, but some of the reasons equities underperformed are starting to correct themselves. We're seeing companies raising dividends – which is a key catalyst, and investors' risk appetite is returning.
How has the euro crisis affected your fund?
Mining equities bore the brunt of investor risk aversion last year and appeared to be the whipping boys for the market's macro growth concerns. Gold mining equities, despite the strength of underlying gold prices, were not wholly spared. So the euro crisis has certainly had a marked effect on the Gold & General fund, as it has of course on equity markets as a whole. The "risk off" sentiment that presided over the second half of last year has been a significant factor behind gold shares' recent underperformance of gold bullion; from that underperformance comes opportunity, though.
What are your biggest concerns for the future?
As equity investors, our major concern is that the eurozone situation deteriorates or we have another macro event that causes another major market sell-off. However, a sell-off independent of the direction of the gold price and irrespective of the operational and economic strength of gold companies creates opportunities, as it has done recently.
Are you concerned about resources being finite?
For us, our focus is not on finiteness but rather constraints to commodity production expansion and whether we see fundamental tightness between supply and demand in individual commodities. That tightness creates support and upwards pressure for commodity prices and is a key ingredient in selecting which commodity producers we want to be exposed to in the portfolios.
What has been your best investment decision?
Not getting panicked out of our investments during periods of high volatility is always an incredibly difficult decision – but being patient during some of those bust periods in the past decade has been invaluable.
What has been your worst investment decision?
Not spotting the 2008 crisis was a mistake that many people in this industry made. Within that, however, we made a wrong judgment call about the bottom of the market – calling it a month early. We decided to go overweight in equities and even geared up one of our funds which allows it. We got absolutely hammered for a month, and it took us about six months of positive performance to claw back the value lost in that short loss period. BlackRock Gold & General