Something investors might not be aware of – the Old Mutual Gold Fund holds the top five South African gold miners (70%) as well as six global gold miners (30%) in its holdings.
If one does not have a share portfolio, the best way to acquire gold shares is indirectly is through this fund. It is the only gold fund available through the collective investments (unit trusts) offer.
Over the past 10 years this fund has underperformed all other indices, as it mirrors gold shares. It has delivered a disappointing -5% per annum return.
Until recent times the fund held a big exposure to platinum, and would therefore have best been described as a precious metals fund. With the platinum price falling significantly from $2 300 an ounce to the present price barely above $800, it suffered far more than the gold mining sector. Fortunately, it no longer has platinum exposure and is now fully gold-focused.
Its biggest foreign gold miner is Randgold Resources, and a $6 billion all-share merger between Barrick Gold and Randgold Resources has received shareholders’ approval. This will create a global gold giant that will dominate the African gold industry.
Meryl Pick has managed the Old Mutual Gold fund for the last three years. She is fully invested in gold shares and does not hold any gold exchange-traded funds (ETFs). She remains optimistic about the gold price as she believes there is a high correlation between the gold price and the dollar: “We should see the gold price strengthen on the back of the weakening dollar,” she says, adding that it may not happen straightaway “but we are getting closer”.
The fund is known as being in the highest risk sector because it is so specialised. Its fact sheet recommends that your investment horizon should not be less than five years.
If the gold mining sector is about to come out of its slumber, then maybe it is a good time to invest while its share price is still low. Those long-term holders of the fund may yet be handsomely rewarded for their patience.
Source: The JSE
The Old Mutual Gold Fund chart above illustrates that the price has broken through the 200-day moving average (red line) over the last 12 months – if it can hold it, it is very significant.
What happened to the gold miners in the Great Depression years?
Let’s briefly examine a ‘worst-case scenario’ by considering the terrible crash of 1929, which led to the Great Depression. The Dow Jones (the top 30 US Industrial companies) fell almost 90%. The index went roughly from 400 to 40. It was the most devastating collapse ever. It took a mammoth 25 years to recover.
At the time there was a gold mining company known as Homestake Mining. It was the first mining company to list on the New York Stock Exchange.
Its share price did the exact opposite of the Dow Jones. An investor with 10% exposure in it would have made up their losses. This illustrates the value of having at least 5-10% of one’s investable portfolio in gold. Gold is by nature countercyclical.
The US stock markets continue their longest term ever of a bull trend (10 years). There are dangers and investors would be well advised to protect themselves by purchasing some ‘insurance’ in the form of gold exposure.
The 30-year long-term trend of gold in rand terms is intact.
If the gold mining sector is poised to finally turn around because of a favourable Mining Charter that helps all stakeholders benefit from the resources in the ground then now may be a good time to start investing in South African gold mines again.
We see that gold shares are extremely cheap – their prices are back where they were in 2001/2. The evaluations are excellent, and relative to other assets such as stocks and the bond market, the gold miners are offering superb value. This has got to be one of the best buying opportunities in many years.
A prudent investment portfolio may look something like this in present times: 60% in equities, 30% in cash, and 10% in gold.
David Melvill is an independent investment advisor based in Montagu.