Is now the time to invest in gold?

12th July 2013

Gold, the investor’s ‘safe haven’ of choice has endured a bruising first half to 2013 but given the battering bullion has taken, should intrepid investors be dipping back in writes Philip Scott.

The precious metal’s value has collapsed by a massive 35% from  its September 2011 peak of $1,900 per ounce to some $1,235.

The financial crisis saw the price of bullion, already in the midst of a bull market, accelerate. But it has endured severe volatility so far in 2013. In April it suffered its biggest sell-off in more than 30 years, wiping some $1trillion off the value of reserves.

A number of theories in regards to the fall were put forward, one was that investment banking giant, Goldman Sachs, recommended clients go ‘short’ bullion, essentially bet against further rises for the time being as it cut its long-term forecast for the precious metal.

But gold, is also a traditional hedge against the US dollar, and economic recovery stateside has boosted the greenback but taken the shine of bullion.

Just last month, the price of gold plummeted to its lowest level in three years, to $1,180, as the fears over the US Federal Reserve tapering back its massive stimulus measure, its so-called quantitative easing programme, rocked markets.

Gold mining shares

Gold mining companies’ shares have also underperformed the wider market with the World Datastream Gold Mining index falling from a peak of 2,545 points in August 2011 to 915 points in June this year. A fall of 64 per cent compared with a rise of 35 per cent for the MSCI World Index over the same period.

But analysis from fund broker Hargreaves Lansdown of the World Datastream Gold Mining index suggests gold mining shares look cheap. The price to book of the gold miners, in other words their stock market value compared to their book value is 0.95 having been at 1.61 a year ago. A price to book of less than one implies a company is being undervalued.

But while the price to book measure suggests gold share prices are cheap the analysis also indicates there may be further to fall. The book value of gold miners has only fallen 14.3 per cent from its peak in April 2011 and even after this fall it remains quite high. If the book value of gold mining companies falls then the price to book will be higher than currently indicated.

Notably new management has taken over at many gold miners, and as a result it is anticipated that many will write down the valuations of many of the projects and get all the bad news out there.

Adrian Lowcock, senior investment manager at Hargreaves Lansdown says: “They are likely to write down the valuations to the lowest possible level as they can attribute the overvaluation to the previous management – throw out everything including the kitchen sink. Book values are likely to fall further still, however with gold shares having fallen 64 per cent they are already pricing significant further falls in the book values of gold mining companies.

“Trying to call the bottom of the gold market is a bit like to trying to catch a falling knife. However all investments have a price at which point they become very attractive to investors. Momentum remains very much against gold mining shares and as Sir John Templeton once said ‘If a particular industry or type of security becomes popular with investors the popularity will always prove temporary and, when lost, may not return for many years’. There may be further to fall before we reach the bottom, however investors who are willing to accept the risks might find some attractive long term opportunities by investing in gold mining shares.

But investing in gold like other precious metals and commodities requires investor to take a long term view and be willing to accept some volatility and the potential for losses in the short term. Investors can however minimise the risks of investing in this asset class by drip feeding their investment to reduce timing risk.

Where to invest?

Lowcock as well as fellow broker Charles Stanley Direct tip the BlackRock Gold & General as suitable for investors who wish to get direct access to gold mining shares, although it is likely to be more volatile than diversified equity funds.  Lowcock says: “The BlackRock team continues to focus on companies already extracting gold from the ground, rather than those reliant purely on finding new reserves. They prefer those companies with the capacity to grow their production while keeping costs low. Low cost producers are usually companies with new pits as the highest quality and most accessible ore is usually mined first.”

Read Mindful Money’s interview with Evy Hambro, manager of the BlackRock Gold & General fund here

Rob Morgan, pension and investments analyst at Charles Stanley Direct also rates the First State Global Resources fund as a viable option for those looking for access to gold within a diversified commodities fund. He says: “The First State team has considerable experience of investing in the mining and resources sector. I believe their approach could reward patient investors over the long-term, though remember this is a specialist fund whose performance depends on commodity prices, which can be volatile.”

Lowcock concurs, he adds: For investors wishing to take a more diversified approach to gold – this fund has around 17m per cent in gold and other precious metals companies.  The team has vast experience and local knowledge of investing in the mining and resources sector and we believe their tried and tested investment approach could reward investors over the long-term. This is a specialist, high risk fund that is heavily dependent on the outlook for commodity prices. This means it is essential for investors to adopt a long term investment horizon, at least five to ten years, and accept that performance is likely to be volatile.”

Investors looking for a more direct investing route into gold could go for a gold exchange traded fund (ETFs). ETFs are like tracker funds, in that they follow a particular index or market, they are listed on the stock exchange though so, you can trade them via a stockbroker as you would shares with the added bonus of being free from stamp duty. ETF providers including  Lyxor, ETF Securities and iShares offer a range of broad commodities and some gold focused products.

Leave a Reply

Your email address will not be published. Required fields are marked *