In
January, the Fund fell by 2.7% (the FTSE Gold Mines Index
was -7.4%, gold -3.4%, silver -1.4% and palladium +2.7%).
Last year, the fund was down 7.7% after a rise of +80%
in 2003. The sector's correction starting in early December
continued in January owing to the unexpected rise in the
USD but, as of now, there are signs that this may be coming
to an end, particularly in the small and medium cap area
where the fund has its biggest bets. More on this later.
We remind investors that institutional weightings in gold,
mining and resource shares remain way below the averages
of the '80s and '90s. The fund remains highly leveraged
to a gold price recovery. It holds pre-IPO stock (eg African
Minerals), a much reduced bullion position (only 4% and
now only palladium), and with 91% invested in shares,
overwhelmingly small and mid cap companies, some 5% of
this is in options and warrants.
In
January we added to Ballarat, Climax and Gallery Gold,
as well as six other positions. At the same time we
took money out of Oceana (problems with its New Zealand
mine), Perserverance, Bendigo and some others. Baker
Steel, advisers to the fund, and experts in the small
and mid cap area, visited Bendigo, Ballarat and Perseverance
in January. The fund's biggest position (Randgold, nearly
6% of the fund) is benefitting from higher grades at
its Morilla flagship mine and overcoming teething problems
with its expansion.
We
mentioned last month that the corrrection was happening
against a very positive news flow, which made us think
that the sell-off is largely stronger USD related and
therefore temporary/technical. There is more good news.
The Bundesbank has decided not to exchange (as yet)
its gold reserves for fiat currencies. The uptake of
Exchange Traded Funds in the US, Australia and Europe
has been strong, with 7.5% of world gold mine production
in 2004 going into ETF products. Consultancy group GFMS
forecasts that gold will average USD447/oz in 1H05 because
of strong investment demand. AngloGold Ashanti said
it wishes to have greater exposure to the spot price
in future; it reduced its hedge book by 2.2mn oz in
4Q04.
Every
so often, we think something happening in the gold world
is sufficiently important for us to emphasise it: total
speculative (net long/short) gold positions on COMEX
are now back to levels last seen in early 2003, near
5mn oz, down from 20m oz in 4Q04. We remind our
readers that early 2003 was just before the fund rose
80% without a single month of correction. What makes
this particularly intriguing is that in the course of
the gold bull market that started in 2001 each recovery
high in the COMEX net long position has been larger
than the one before. We don't know where the net long
position will top out in the next mini-bull cycle (we
think that our stealthy major gold bull has years to
run), but if we assume that it'll be in the 25-30mn
oz region, this indicates a gold price of well over
USD500. At USD500 the fund, based on the gearing that
P&C Director and former Global CIO of Rothschilds,
Bruce Albrecht, has calculated for each fund holding,
should have a theoretical fair value of 60-80% above
current levels.
Bruce
Albrecht also points out something else that needs emphasis:
there's a shift going on from large cap stocks into
mid cap and smaller names, with which the fund is loaded.
This is typical for an "up cycle' in gold and is
critical for your fund, to which those who remember
the 80% up move in 2003 will surely testify.
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