At the time of writing, 9.30am Thursday 11th October, gold bullion is moving sharply higher, almost at $748/oz. The belligerent nature of the recent action of this gold bullion bull market does not sit comfortably with the perception that everything else is back to normal. Much of the enthusiasm for gold obviously relates to the weak dollar but we think it's clearly more than that, it also relates to an abiding concern about the well being of global economies.
BlackRock Merrill Lynch Gold & General and the Investec Global Gold Fund are both at new all-time highs. What has been particularly satisfying over this recent period has been the significant out-performance by gold shares over gold bullion. Since the end of July gold bullion, in sterling terms, is up 10% which is very good but the BlackRock Merrill Lynch Gold & General fund is over 25% which is a lot better. As we have said often before, we expect, over the long-term, for gold mining shares to out-perform gold bullion by about 3 to 1.
Graham Birch, in his most recent BlackRock Merrill Lynch Gold & General Fund Manager's Report, said "Having soared to recent highs in September we remain confident on the long-term outlook for gold and suspect that the previous US$850/oz peak is now within reach. With strong jewellery demand, a growing interest in gold as a diversifier and stagnant mine supply all driving performance going forward, it is also worth remembering that the gold market frequently performs well in the final quarter of the year."
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If gold reaches $780/oz by the date of the rugby world cup final, it will have doubled since the final in 2003!
John Hill and Graham Wark of Citibank, recently wrote that Central Banks had been forced to choose between global recession or sacrificing control of gold, they said "We believe that the policy resolution to the credit crunch will take the form of a massive, extended "Reflationary Rescue" in a new cycle of global credit creation and competitive currency devaluation which could take gold to $1,000/oz or higher.
Fundamental to the story is the fact that paper money is very easy to create. It has been calculated that currently the US are increasing their money supply by 13% per annum. Gold, however, is very difficult to create; in fact, world gold production peaked in 2001.
Gold-related investments, as a percentage of the model portfolio have now risen from 25% to above 30% thanks to great performance. We plan, over the next few days, to adjust this back to 25% for portfolios that are based upon the model portfolio.
By John Robson & Andrew Selsby at RH Asset Management Limited, as published in the Onassis Newsletter, a fortnightly newsletter that gives insight into the investment markets.
For more from RHAM, visit https://www.rhasset.co.uk/
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