Hold gold and buy miners

I interviewed two important people for you this week Anthony Bolton and Alistair Darling. Subscribers can read the words of the formerhere and those of the latter next week. But if you're a regular reader, you will know by now the kind of questions I ask everyone. Do they expect inflation or deflation? When will China implode? Are fund managers responsible for the outrageous levels of executive pay? What would they do if they got to be a benign dictator to the world for 50 years? And, of course, do they hold any gold?

Darling holds no gold. No surprise there. Bolton was a different matter. He's a pretty optimistic kind of a guy overall, but he still thinks that the average portfolio should be 10% invested in gold. He sees why it is the "anti currency" (the one that will hold its value if all others fall). He gets why it should be held as an insurance in times like this. And like us, he expects it to have a massive exponential move at some point that will take it to new highs way beyond its current levels.

Right now, he says, you could read the papers and think that everyone owns gold. But while fund managers and savvy retail investors might talk about gold endlessly, not many of them are holding much of it. However, as our policymakers continue to dither in the face of disaster and they become more convinced that it is, as John Stepek puts it, the "only sane investment in an insane world", they will.

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But here's the odd thing. The gold price has risen hugely in the last few years. Yet while you'd think this would be excellent news for the gold miners, their share prices haven't caught up at all despite the improvements in their cash flows and their profitability. That's presumably because neither the miners nor their potential investors are convinced that the gold price will stay high. That's something even the gold bears are beginning to spot.

David Stevenson, a mostly very sensible FT columnist, considers himself a "vicious gold bear". However, having spotted the anomaly between the high gold price and the lagging gold share prices, he is nonetheless "prospecting around low-cost gold miners with low gearing, minimal hedging and lower-than-average capital expenditure commitments".

We've written about various individual stocks in the magazine in the past, but if you would rather someone else do the work for you, the big name in the sector is the Blackrock Gold & General Fund (which I've been holding for nearly a decade now). Otherwise, you might look at the Junior Gold Fund, run by Jim Slater's son-in-law Angelos Damaskos, or, as David Stevenson is, the Golden Prospect Precious Metals Fund. All these have done well in the last year. But if the gold price stays high enough for long enough to convince sufficient numbers of investors that it will stay there, they'll do a lot better in the next one.