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James Carthew: worried about markets? Try these golden trusts

The gold price has been on the rise this year and for those who see the trend continuing, investment trusts offer opportunities.

 
James Carthew: worried about markets? Try these golden trusts

When writing after Donald Trump’s election, I said the slumping gold price might recover and that now seems to be happening – since just before Christmas the gold price has risen from $1,127 to $1,224..

It is still some way off the highs of July 2016 (around $1,370) and a long way off the levels of August 2011 (more than $1,900) but it is on a rising trend.

The reason why I think the gold price is rising is fear. Fear of the effect Trump’s policies might have on US finances, fear of a breakup of the eurozone, fear of rising geopolitical tension – there’s a lot of nervousness around. I can see why this might prolong the current gold price rally.

There are arguments for a more dramatic increase in gold prices. Alan Greenspan, arguably in my view the architect of much of the mess we find ourselves in today, has been interviewed for Gold Investor, the magazine produced by the World Gold Council. He is deeply worried about the prospect of stagflation. He says that lower productivity growth is causing economies to stall, which he credits as one of the causes of the growth of populism.

At the same time, we have low unemployment in most developed markets and this, he thinks, is contributing to upward pressure on wages which will, in turn, feed through to inflation. If he’s right (and I have doubts over this given I’m not sure he is factoring in the pressure on the jobs market that is coming from automation), we could be in for a period of soaring gold prices.

So, if you think there is a chance that gold price might have further to go, how best to play it? Gold exchange traded funds might be the simplest solution. Then there are some funds that invest a portion of their assets in gold such as Personal Assets (PNL ), which held 11.5% of its portfolio in the precious metal at the end of October.

However, an investment in gold mining companies gives a geared play on the price. Given that not many of us are well versed on the vagaries of gold mining companies, investing in a diversified portfolio of them via a closed-end fund and outsourcing stock selection to an expert in the field makes sense.

The purest play on the gold mining market is Golden Prospect Precious Metals (GPM ). It had 56% of its portfolio invested in gold mining shares at the end of January with most of the rest of the balance in silver and platinum.

GPM has a relatively concentrated portfolio (49 holdings, with the top five accounting for more than 30% of the fund). Around three quarters of the portfolio is invested in companies producing gold – much less speculative than the ‘developers’ or ‘explorers’ that make up the balance of the fund.

I wrote about GPM in September 2011, more or less ringing the bell for the top of the gold price. Back then after a strong run, the fund was looking to expand. The falling gold price stymied its ambitions unfortunately and GPM is sub-scale today (market cap £26 million). I think that is a real shame as it has done a reasonable job for investors.

While acknowledging that the fund has had a phenomenal run, with the net asset value (NAV) up 86% over the past year, if the gold price carries on climbing, so should the NAV. It is also worth noting that GPM’s share price today, at 39.5p, is well below peaks achieved in April 2007 and October 2011 when the price was in the 120s.

I appreciate that for many readers, GPM’s £26 million market cap would make the fund uninvestable. There are other, larger funds available but their gold content is lower.

BlackRock World Mining (BRWM ), with a market cap of £686 million, had 18.9% in gold at the end of December; the £97 million City Natural Resources (CYN ) trust had 18.4% at the same date and the £101 million BlackRock Commodities Income (BRCI ) held 13.1% in gold at the end of January.

GPM’s chairman thinks gold is on the verge of a new bull run. There are plenty of investors out there who think inflation is going to worsen. I think it is worth keeping an eye on gold. 

James Carthew is a director at Marten & Co. The views expressed in this article are his and do not constitute investment advice

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