BlackRock Gold & General Accumulation Units

The great Gold Rush of 1849 caught the world’s imagination, but few people actually made money from the brief frenzy of prospecting. Gold has been making the headlines again – it recently hit $1000 per ounce for the first time – but in our opinion this is no short-lived ‘gold rush’.

Why might the price of gold continue to rise in the long term? The answer is the law of supply and demand. Demand is high, thanks to growing prosperity in emerging markets. However their regions are not immune from troubles with many suffering from double digit inflation. Elsewhere a weak dollar and financial problems in the western banking sector suggest continued uncertainty in the world economy – a condition which usually favours gold.

Meanwhile gold mine production continues to fall, a situation made worse as power outages cause closures at large South African mines. Things look even grimmer in exploration; only 15m ounces of gold were discovered last year compared to the 80m ounces that were mined. It seems the world is fast running out of new gold and many of the existing reserves are in countries with their own geo-political problems keeping prices firm.

There are two main ways to benefit from a rising gold price: buy bullion or invest in the shares of companies who stand to benefit from the rise in price of precious metals – such as mining and production companies. We believe the greater growth potential can be found in buying such shares because a rise in the gold price should lead to a bigger rise in the profits of gold companies – see explanation below.

The BlackRock Gold & General Fund is our favourite in the sector. It has risen by 806% compared to 157% for the gold price over the last ten years, although please remember that past performance is not a guide to future returns and the value of the fund will fall as well as rise. Whilst there is no direct link between the gold price and the shares of the companies that the BlackRock fund invests in, we feel now could be a good time to invest because gold shares have lagged the price of bullion so far in 2008 and we believe they could soon catch up.

Many gold companies have been increasing their dividends, suggesting that costs are under control and earnings are growing. While the potential is great, you should remember this is a specialist and focused portfolio which increases volatility so you must invest for the long term. In our opinion the BlackRock team are the best in the business and investors looking to capitalise on this theme need look no further than their Gold & General Fund.

How does a rising gold price lead to an even greater rise in mining company profits?

ABC Gold mines gold worth $100m at a cost of $60m – therefore making a profit of $40m.

If the gold price rises 10%, ABC Gold mines exactly the same amount of gold at the same cost of $60m but it is worth $110m. Profits are therefore $50m. A 10% rise in the gold price has led to a 25% rise in profits.

This assumes that ABC Gold have been able to keep their costs under control. Remember that it can also work the other way. If the gold price falls 10% ABC Gold’s profits would have fallen 25%.

This fund does not invest in gold bullion, it mainly invests in gold and other precious metal mining related companies.