BlackRock Gold & General Accumulation Units

2011 was a volatile year for gold. Over the course of the year it was up around 8%, but the price reached over $1,900 per ounce in September before falling back sharply to under $1,600 at the end of December.

The recent falls seem to be the result of mounting euro zone debt concerns, something you might expect to be positive for gold as it is often regarded as a safe haven in times of turmoil. Yet investors chose instead to take short-term refuge in the US dollar. It would seem the euro zone crisis has created the need for many institutions to hold additional reserves, and gold has seen the same flight to cash that riskier assets such as equities suffered.

In my view the fall in price will be temporary, as the attractions of gold are undiminished. I believe the crisis in Europe will lead to quantitative easing (QE), essentially the printing of new money which serves to devalue the currency. This, combined with low interest rates (and perhaps further QE) across the rest of the developed world, should increase demand for gold as a store of value which cannot be debased by governments and central banks. I believe it could therefore be an opportune time to consider building exposure, although of course the price could fall further in the short term.

Buying physical gold or an ETF that tracks the price are ways to do this, but a more risky (and potentially more rewarding) way is buying shares in gold mining companies. A pronounced gap opened up between the price of gold bullion and gold shares over 2011, whilst the gold price appreciated overall, gold mining funds fared far worse, with BlackRock Gold & General down 18.5% (Source: Lipper Hindsight. 03/01/2011 - 02/01/12). Over the longer term I don't think this divergence can last and I believe it represents an interesting opportunity.

Whilst gold itself is seen by many as a safe haven asset, mining shares are seen as much riskier. When markets become risk averse the gold price often rises, but this doesn't necessarily translate into gains for gold mining shares. However, over the longer term a higher gold price means greater profits for miners, and this should eventually mean higher share prices across the sector. Indeed such has been the growth in profits over the last few years that many gold miners are now able to pay shareholders dividends. It could attract more investors to gold mining companies who traditionally used to invest most of their profits for growth, taking on further mine development or exploration - a more uncertain and risky proposition.

Evy Hambro, the manager of BlackRock Gold & General Fund, is more bullish on the prospects for his fund than I can ever remember. He compares gold equities to a "coiled spring" ready to bounce back strongly. Given the disappointing performance over the last 12 months I am inclined to agree with him that a significant opportunity is presenting itself, though there are no guarantees and the fund can fall as well as rise and you could get back less than you invested. Investors should remember that gold remains volatile, and the shares of gold miners even more so; a specialist area such as this shouldn't account for more than around 5% of a portfolio. The fund remains on our Wealth 150 list of what we consider to be the best funds across the major sectors.