Clients questioning the portfolio implications of the recent volatility in gold and gold-related assets can rest easy, according to Evy Hambro, chief investment officer of the BlackRock Natural Resources team.
Gold prices dropped approximately 12% (from US$1565/oz to US$1377/oz) between 11 April and 16 April 2013. Hambro reassured investors that this was an outflow of the ‘hot money’ that was in the market. “The recent series of trades is the main reason for the move in the price.”
However, fundamental drivers have not changed, said Hambro, and people taking longer, more traditional positions, are not likely to sell.
In considering the value of gold stocks, Hambro said recent events would “give greater traction to gold managers who are moving to a more shareholder friendly way of doing business, keeping costs down, not dropping cut-off grades and not using high prices to calculate worth.”
Hambro made the following points:
It is thought the equivalent of 100 tons of gold futures were sold last week, followed a few hours later by a trade of some 300 tons, likely due to programmed trades kicking in following price drops. While still positive in long positions, the shorter term market became bearish from that point. At the same time the market saw a sharp rise in the physical gold premium, including in demand from traditional markets in Shanghai and India as well as some less traditional pockets in the developed world – although there has been no visible central banking activity on this front.
Profits have been taken in the past two months, prior to the most recent sell-off, as evidenced in redemptions from hedge funds.
Current prices leave gold trading close to the marginal cost of new supply, putting it more in line with the pricing structures prevailing for other commodities such as aluminium, zinc and so on.
The gold companies that have responded positively to investor demands to improve practices, including acceptable leverage and realistic valuation levels (closer to US$1000/ oz), are unlikely to be severely affected by the current situation and in fact will be well positioned to maximise the benefits of a recovery.