Just recently at R H Asset Management, we decided to take profits on all our energy investments, Canadian Oil Sands Trust, Merrill Lynch World Energy Fund and Investec Global Energy Fund. These investments had been built up since August 2004 and represented considerable profit which, over the very recent period, had been enhanced by the strong dollar.
We still believe that over the next 15 years the whole commodity sector will enjoy very considerable growth. However, raw material and energy investments will, over that time, be subject to considerable volatility. The near term risk is that we are moving towards a global economic slowdown, so the value of these investments could in the short-term be undermined. At some point in the future, we expect to re-invest in this market on a pull-back.
During 2005, gold bullion has moved between $410/oz and $445/oz. Gold is a commodity with unique qualities and should be the major beneficiary of the deterioration in global economic conditions which we expect. Clients' portfolios benefit by being invested in Merrill Lynch Gold & General fund, an outstanding fund which, since May, has enjoyed a considerable rise. The ratio of gold bullion to gold mining shares has, recently, been moving very positively in favour of gold mining shares.
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There are as many target prices for gold bullion as there are hairs on the back of a dog. Our modest intermediate target of $500/oz is not at all out of the way and our long-term target of $1,000/oz is at the low end of most gold bulls' forecasts. In the short-term, and that possibly means before the end of 2005, gold bullion should reach our intermediate target of $500/oz, which, if coupled with an improving ratio of gold shares to gold bullion, would make the upside considerable, sufficient to take the Merrill Lynch Gold & General unit price to an all time high above 544, which is about 20% above current levels.
In summary, the long-term demand for raw materials and energy created by the emergence of China and India, about one third of the world's population, is sufficient, over the next few years, to drive commodity prices to unthought levels. We would expect this sector to become the most important of all during that period.
By R H Asset Management, in the Onassis newsletter, a fortnightly newsletter that gives insight into the investment markets.
For more from RHAM, visit www.rhasset.co.uk
