Gold fund strategy for the decade - Building on Brown's Bottom
Changes in the world gold production scenario have, of necessity,
meant that to stay ahead of the game, gold fund managers have had to
make major strategy changes.
Author: Lawrie Williams
Posted: Thursday , 19 Apr 2007
ZURICH
Speaking at a luncheon at the Denver Gold Group's European Gold Forum in
Zurich, Graham Birch, Managing Director of Black Rock Investment
Managers, which administers the Merrill Lynch Gold and General Fund,
apprised the audience of the changing strategies in the gold equities
market that has kept the fund well ahead of the gold price performance
and the FT Gold Mines Index over the past few years.
From 2000 to 2002 - a time coined by Birch as Brown's Bottom - the gold
price reached its recent nadir. The epithet of Brown's Bottom was due to
the decision at that time by Britain's ‘cautious' Chancellor Gordon
Brown, whose spin doctors have promoted him as some kind of ‘financial
genius', to sell off a good proportion of Britain's gold reserves. This
timing exactly mirrored the gold price ‘bottom' and the subsequent gold
bull market, which has so far lasted almost exactly five years, began
almost from the exact date that the UK gold sales programme finished.
The gold price has risen by 167 percent since that date, losing Britain
some £2 billion which makes the Gordon Brown ‘financial genius' spin
somewhat tarnished.
Birch is undoubtedly bullish on gold - as were most other speakers at
the conference who felt that gold is only partially into its latest bull
run. He has also had the opportunity to base his group's investment
decisions upon these views with some success. However, as he pointed out
- in this relatively short space of time the gold supply situation has
changed dramatically, and his funds' investment strategies have had to
move accordingly.
He also pointed out that Gordon Brown in his gold sale decision was not
the first British Labour Party minister to sell gold just as the market
took off. Harold Wilson's earlier administration also sold off some of
the country's gold reserves just prior to the boom which took gold to
record price levels in the 1970s!
As Birch pointed out in his presentation, the gold production scenario
has changed dramatically since the start of the current millennium. The
world's historic top four gold producers, South Africa, USA, Canada and
Australia have all shed production. Gold output in South Africa has
fallen by 36 percent between 2000 and 2006, that in the US and Canada
combined has dropped back 30 percent and Australia by 18 percent. Indeed
Australia has been overtaken as the world's third largest producer by
China.
What this has meant is that Birch's Group's gold fund investment pattern
has also changed dramatically to take account in the changes in source.
He and his colleagues running the Merrill Lynch fund have cut their
exposure in the US and Canada by 31 percent, South Africa by 41 percent
and Australia by 21 percent. On the plus side they have boosted exposure
to China by 10.4 percent and Russia up to 8 percent, as well as
investing in companies operating in other ‘new' gold producing countries
as well. But not only has the regional investment pattern changed, the
fund has also put small, but significant, percentages of the fund's
money into other precious metals - notably platinum and also some into
copper-gold miners. For some purists this dilution of gold content is
almost heresy - but Birch has only to point to the fund's performance
against the gold price and the FT gold mines index to have most of his
investors remain happy with such changes.
Overall too, Birch pointed out that world gold production has been
falling for the past five years and he feels it will continue to fall in
2007, despite the latest GFMS figures suggesting a small increase. Birch
feels GFMS is too ready to believe what the producers say they will
produce this year. Interestingly, Martin Murenbeeld at a breakfast
presentation at the same event, also pointed out that his financial
model, which has been remarkably accurate in recent years, also showed a
continuing decline in world gold output.
So what other kinds of changes has the Merrill Lynch fund made.
Diversification has not only been regional, but in numbers of companies
held. In 2000, the fund had 37 holdings and £72 million of assets (of
which 22 of the companies held are still in existence and 13 have been
taken over and two became insolvent). In 2007 - the number of stocks
held had increased to 73 with a total asset value of £907 million.
And which stocks? The fund's biggest individual holdings are, in order,
Lihir Gold, Gold Fields, Zijin Mining, Barrick Gold, Newmont Mining,
Impala Platinum, Newcrest, Industrias Penoles (the only silver stock
Birch feels worth holding), Anglogold Ashanti and Aquarius Platinum.
So where does Birch feel we are going from here? He predicts a
continuing strong gold market as the ‘big four' countries' gold output
continues to fall off, and world gold output continues to decline
overall. He predicts further environmental and political roadblocks
affecting production ahead with Latin American and FSU countries
particularly vulnerable with African politics remaining the "usual mix
of good and bad."
This increases the pressure to diversify geographically; puts a larger
premium on growth; a greater need to allay risk through the production
of other metals; and also on a growing focus on exploration activity.
As far as the future of the Merrill Lynch gold funds is concerned, Birch
means to stay ahead of the trends. He reckons there will be continuing
emphasis on emerging gold producing regions - he is particularly keen on
China - and will be keen to focus on production from mining-friendly
nations like Mexico and Brazil.
He also hopes and feels that at some stage a gold/precious metals Rio
Tinto type company will appear. According to Birch there is no
comparison between the consistent performance of Rio Tinto, with its
diverse range of commodities, with that of the purer gold producers like
Newmont or Barrick in terms of investment returns. His view is that a
precious metals focused company should emerge which diversifies its
mining activity into gold, platinum, silver and perhaps diamonds also,
which would give a much superior risk/return ratio.
From www.mineweb.co.za