Gold fund investors miss out on bullion's bull run

For those investors who took a more mainstream approach of buying gold funds weren't able to reap the full benefits of gold's bull run. The most popular gold fund in Britain has risen 13% this past year while the price of gold has climbed 41%.

Tahmina Mannan
7:00AM BST 28 Aug 2011
The Telegraph

The soaring price of gold has seen shrewd investors – who backed the trend early on – pocket massive returns. However, those who took the more mainstream course of buying gold funds have yet to reap the full rewards of gold's bull run.

The price of bullion has repeatedly set new highs in recent weeks. It hit yet another record on Tuesday of $1,886.50 in London (it breached $1,900 on other markets), with forecasters predicting that it will break through the $2,000 barrier by the end of the year, if not earlier.

Fears about the worsening euro debt crisis and prospects of further quantitative easing in Britain and America may see increased erosion in the value of paper money, with investors yearning for the days of the gold standard.

But hundreds of thousands of investors who invested in gold funds – pooled investments in gold-mining shares – rather than the bullion itself will be disappointed that their returns have not matched those on the actual metal.

While the price of gold has climbed by 41pc over the past year, Britain's most popular gold fund, BlackRock Gold & General, has risen by just 13pc (still not a return to be sniffed at, of course).

The difference is even more stark over the past six months. BlackRock's fund has inched ahead by just 3.5pc while the gold price has shot up by nearly 25pc.

Over the past few years, private investors have been pouring cash into gold funds. Figures from Lipper, the fund analyst, show that since 2007 investors have been steadily putting more money into gold-related shares.

In 2010 investors threw nearly £1.4bn into gold equities, compared with £233m in 2009. In 2006, before the financial crisis, they invested £1.25bn.

Philippa Gee, the managing director of Philippa Gee Wealth Management, said: "The funds don't invest in gold directly, they typically look to invest in gold-related stocks that are more liquid and can be traded more easily, particularly mining stocks.

"The advantage to investors is that this means the funds are more diversified than simply holding gold. But the reverse of that coin is that, when gold itself is doing well, you are unlikely to benefit by as much."

Catherine Raw, the co-manager of BlackRock's World Mining fund, said recent periods of risk aversion from shares had been acting as a drag on gold-mining equities.

"Interest in gold shares has been growing in the wake of the financial crisis, with mining shares doing better in Asia," she said. "This shows the disconnect between how the West looks at the market and how the rest of the world does."

Many believe that gold shares offer better value than bullion itself. Gold equity valuations are in historically low ranges but earnings growth on the back of higher gold prices and rising dividends could be the catalysts to send the share prices of these companies higher.

If so, the current weakness in gold-related shares represents a smart money-making "arbitrage" opportunity.

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