Emma Wall: Hello, and welcome to the Morningstar series, Why should I invest with you? I'm Emma Wall and here with me today is Evy Hambro, Manager of the BlackRock Gold & General Fund.
Hello, Evy.
Evy Hambro: Hi.
Wall: So, it's been quite interesting time for your fund, up until the end of 2010 it had a fantastic run, then a tumultuous 2011, and since then really it's been down with 40% losses so far this year. Why has the fund fared so badly?
Hambro: Well, obviously, we're exposed to the gold sector. We've had a material fall in the price of gold from – the high was just over $1,900 an ounce by a couple of years ago now. And we're now down to about $1,300 an ounce. So, the liquidation in the gold market obviously took gold shares down because the profitability of the companies is heavily linked to the price of gold.
So, we've seen a deterioration in the price. But the main thing that has been so frustrating for us as investors predominantly in gold equities has been the way in which the companies have been run. So, the management has done just about everything possible to destroy value. And it's now being kind of daylighted that the tide is going out and these guys have been swimming naked. Now, they are fully exposed the mistakes, so we've seen huge write-downs taking place.
The light at end of the tunnel is the actions that are now being taken should deliver or release the value that's inherent in the Companies. We're starting to see that come through, but it's still very early days in terms of people believing that the leopards are going to change their spots.
Wall: Obviously, you do invest in gold shares rather than the commodity itself. How linked then is the gold price to these equities?
Hambro: Yeah. Well, historically, the gold equities have had a very high beat into the price of gold. So, if you go back and look at a long series of data you will see anywhere between a 1 to 1 and a 3 to 1 relationship between the two. So, for 1% change in price, 1% or 3% change in the value of gold share. Over the last few years though that relationship has actually not only been in – been nonexistent, it's actually been negative.
The reason for that is that the gold companies were so insistent on growing for the sake of growth that they were literally chasing marginal ounces to achieve that goal and that didn't allow for an increase in profitability with the rise in the price itself. So the relationship broke down. What we've seen since the price collapse over the last kind of six to nine months is our relationship has now come back into full force.
It's obviously been a negative relationship; gold is down 20%, the shares are down 40%, so the relationship is very much back. And when we see rallies in the price of gold, you see that kind of 2 to 1 or anywhere between 1 and 3 to 1 relationship happening on the bounce. So, I think the relationship is back and people should be kind of looking towards that as a guide to the future.
Wall: Looking then at the future, are we reliant on the gold price, the fund to pick up?
Hambro: Obviously, the gold price is the single biggest determinant in performance in the gold shares. Having said that though, the shares are at a very, very low rating point relative to history. So, if management can be brave enough to take some of the tough decisions to not produce some of the ounces that don't need producing focus on the profitable ones, or actually bring production down but profits up; simple things like that, they will release a lot of value in the space.
The fundamentals for gold are still very supportive. With the lower prices, we'll see lower levels of production and actual projects being cancelled and so on. So, we're not going to see the production growth coming through and therefore damaging the outlook for price; we'll see the opposite happening.
We've seen huge buying from Central Banks again this year. I think it's probably the second largest year in the last 40 years, last year being the biggest. We've seen a massive upsurge in physical buying by individuals mostly out of China. China is likely to consume over 1,000 tons of gold this year.
So, the fundamentals are still supportive, but we're seeing this kind of transition in the gold market from kind of quantitative easing to the threat of tapering that seems to be kind of being pushed further and further out into the future, and that's kind of overshadowing the fundamentals right now.
Wall: So, it's early days, but we can expect to pick up?
Hambro: Yeah. I think its early days, but I think we can easily expect some change in the companies and the change in those companies should be releasing value, and that's why also we wait for some clarity on the gold market.
Wall: Evy, thank you very much.
Hambro: Thank you.
Wall: This is Emma Wall for Morningstar. Thank you for watching.
