Comment: More golden moments to come for investors

OUR athletes have enjoyed a fantastic gold rush in the London Olympic Games. But, for investors, gold has proved to be something less than a Mo Farah moment of triumph.

In fact, the bullion price has fallen 15 per cent from a peak of $1,989 an ounce last year to $1,617 currently.

Worse still has been the performance of gold miners’ shares. The FT Gold Mines Index – comprising major gold miners accounting for annual output of more than 300,000 ounces – has tumbled almost 40 per cent from the highs of last year.

After a five-fold rise in the gold price in the past decade, a setback could be seen as overdue. And gold mining companies have been hit by well-publicised problems. Huge cost over-runs, wage inflation, ill-­conceived acquisitions and management firings and upheavals have all taken their toll.

However, recent troubling developments suggest the gold price should come in for some support and that gold mining shares in particular are due a lift from their current lows. Investors should be taking the opportunity to top up their holdings rather than sell down.

For centuries, gold has been an ultimate store of value in periods of financial crisis, currency instability and crises in government finance. Few doubt we are in such a period now. Across the Western world, governments are battling with horrendous deficit levels. Sovereign credit ratings are under intense pressure. And central banks have resorted to unprecedented levels of monetary easing in ever more desperate attempts to stimulate economic activity.

In the UK, quantitative easing now extends to £375 billion, with more likely by the end of the year. And the European Central Bank is under enormous pressure to print trillions of euros to prevent the single currency from falling apart.

In recent weeks, a new factor threatens to add an explosive element to this toxic mix. The worst drought in the United States for at least half a century – caused by the hottest July in history – has destroyed one-sixth of the country’s crops.

This poses two threats to the global economy. The first is of a surge in global food inflation as the price of sweetcorn soars on world markets. The second is the consequent effect of sharp rises in the cost of food on political stability. The 2007-8 food crisis triggered riots in more than 30 countries from Bangladesh to Haiti, and was widely regarded as a contributory cause of political upheaval across the Middle East – the “Arab Spring”.

While these factors are likely to act as strong supports for the gold price, the more marked effect may be on the price of gold shares as the gap between the two has widened to near historic highs. The upside potential after a period of marked weakness and poor investment sentiment is now considerable.

Choosing which gold shares to hold is a hazardous business – as is the process of gold mining itself. It is notoriously vulnerable to setbacks and disappointments.

The UK-listed mining sector is skewered towards smaller mining plays and these tend to be riskier. Such companies can have ratings that owe much more to hope of successful discovery than actual production – “a hole in the ground with a voluble stockbroker on top” is how some have been described.

The earnings of the larger companies can be critically dependent on new mines coming in on schedule and on budget. And companies often find themselves mining in politically-turbulent areas in the world where the rule of law is not as respected as it is here and where governments can prove both capricious and more than usually grasping.

So for most retail investors the most accessible and appropriate route is through a specialist gold fund.

A popular sector choice among independent financial advisers is BlackRock Gold & General. This fund has done well over a five-year period, but it has fallen 24 per cent in the past 12 months. Another is Investec Global Gold, down by a similar proportion.

There are no pure gold plays in the investment trust sector. The BlackRock World Mining Investment Trust has just 9.4 per cent of its £1bn portfolio invested in “pure” gold mining shares, though this exposure is larger when taking in more diversified mining conglomerates.

City Natural Resources High Yield Trust at 213.75p on a discount of 14 per cent and yielding 2.3 per cent, has almost one-third of its £143m fund invested in gold, silver and platinum producers.

Precious metal mining – gold in particular – is a volatile, high-risk sector and investors should bear this in mind in their portfolio allocation. But this may be an appropriate time to make a modest foray. There is a value anomaly here that suggests a correction is due.

And here is a point to remember: paper money is now being created by governments at an explosive rate. But between 1999 and 2011 annual gold production has risen by just 0.7 per cent.