What do you call a geologist in safari suit? A liar! Just a little joke I heard recently – which I guess is a bit funnier if you work in the resources sector.
But it made me smile because I have always been a bit of a sceptic about gold and, as any fund manager running gold, commodities or resources funds will tell you, they are always coming across the equivalent of the geologist in the safari suit.
I am a sceptic because it is easier to see the attraction of gold at $1,200 an ounce than it was when it was $300 an ounce, which is not that long ago. In other words, any mug can buy an asset when everyone has piled into it.
The gold debate has many echoes of the arguments about TMT stocks a decade ago, when they were on multi-digit P/Es and analysts came up with the extrapolated discounted cashflows that made a case for the P/E expanding even further.
We all know what happened there and I get nervous something equivalent will happen with gold currently.
I tend to fall into the Warren Buffet camp, which says gold is actually not much use for anything other than jewellery and when I hear a case for gold that says demand will stay high because consumers in the Middle East and Asia are maintaining their appetite for the metal, it does not feel like the most compelling argument for gold to go to $2,000 an ounce.
However, I am beginning to change my view after a very enjoyable meeting with a specialist resources fund management group Craton Capital.
Based out of Switzerland, Craton runs three funds: precious metals, global resources, and renewable, alternative and sustainable resources.
Now of course, with around 74% of the precious metals fund exposed to gold, they would be a bull of gold, wouldn’t they? One of Craton’s partners, Doug Ellish, says it is conceivable gold could go to $2,000.
Of course, we all heard those kind of bullish cases made before – do you remember the Goldman Sachs analyst who made bold predictions about oil?
But Ellish’s bull case for gold is over a longer cycle – a number of years rather than months, which feels much more credible and his case is built of something more substantial than demand for gold jewellery.
He points out that in the era of great deleveraging and continued uncertainty about sovereign nations, gold will remain in demand. He also points out the increased buying by central banks, which is driving the price. A useful fact to note is currently only around 1.5% of Chinese central bank reserves are in gold compared to the double-digit amounts held in the metal by the likes of the US.
So it is not hard to see now the Chinese have lost their appetite for American government debt, they will begin to slowly accumulate more gold. Craton’s funds also focus on small and mid-cap gold miners, which are at a significant discount to the gold price.
I am not piling into the gold market just yet, but refreshing to meet somebody who can build a more rational case. Have a look at what they do www.cratoncapital.com
Lawrence Gosling is the founding editor of Investment Week. His views are his own, any comments to him at lawrencegosling@sky.com
