The flight to gold continued this week as fears over Eurozone debt and a possible US default pushed prices past £1000 an ounce for the first time.
Depressed interest rates have encouraged investors to view gold as a safe haven and, as prices soar, the Association of Investment Companies (AIC) has collated the views of key managers with holdings in gold.
Catherine Raw, co-manager of BlackRock World Mining Trust plc commented: "The current fundamentals in the gold market are supportive of higher prices. Investment demand has been the most important driver of the bull market to date and the key factors that have been driving investment demand - concerns about financial markets, Eurozone debt and inflation - are likely to persist for the foreseeable future. The potential for further net purchases by central banks could also be supportive of prices.
"In terms of the gold equities, we believe that earnings will expand as gold prices rise and investors will be attracted back into the sector. The shares are currently trading at attractive valuation relative to bullion prices. The key threat to the gold market is an increase in real interest rates. When real interest rates begin to rise, the opportunity cost of holding gold will encourage investors to sell the metal. At the moment, we believe the interest rate and exchange rate environment remain bullish for gold."
Francis Johnstone and Trevor Steel, managers of Baker Steel Resources Trust said that: "The short, medium and long-term arguments for the gold price are very much still intact, particularly for gold mining companies, which have some way to catch up to reflect the current gold price let alone a rising metal price. We do not hold any physical gold but hold approximately 7% of the portfolio in gold shares, which is set to increase to around 10% of the portfolio. However, our policy is to be project specific rather than commodity specific, so we have no plans for gold to be any particular proportion of the portfolio".
Will Smith, portfolio manager of City Natural Resources High Yield Trust said: "City Natural Resources has long maintained an overweight stance in gold and silver and currently has around 30% of its assets in the precious metals. Among the many events that would cause us to review our overweight stance are a rise in real interest rates, a return to trend growth in the developed economies and a credible solution to the sovereign debt and government deficit currently prevalent. We fully expect pullbacks in the chart, but the drivers of gold's run are still valid and, on many criteria i.e. gold adjusted for Inflation, the chart is not over-extended."
However, there is also a case for other precious metals, said Francis Johnstone and Trevor Steel, Managers of Baker Steel Resources Trust: "We currently have around 9% of the fund in silver, but one must always be aware of the higher volatility of silver compared to gold. We also have platinum exposure through our interest in Ivanplats, our biggest holding (27% of the portfolio)". Will Smith, portfolio manager of City Natural Resources High Yield Trust agrees but still favours gold: "Silver has a much higher beta than gold, but is much more volatile. Gold always attracts the majority of flows into the precious sector."
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