BlackRock's Hambro: Are we missing a golden opportunity?

Evy Hambro, manager of the BlackRock Gold & General fund, discusses what could hamper the spiralling gold price.

Gold is one of the world’s oldest currencies and has a differing set of drivers to the broader commodity complex, but these idiosyncratic qualities are not always fully appreciated.

Although some may argue the current gold price environment merely reflects “a credit crisis-inspired bull run”, the yellow metal has made gains in each of the past 10 years (thanks to a variety of reasons). With gold recently touching all time (nominal) highs of $1,502/oz, we should examine in more detail some of its drivers in the current environment.

Real asset

The generalist investor may well see gold as a safe haven asset for times of uncertainty and strife, which may be in part due to the headlines garnered by the metal during the credit crisis. While gold’s nature as a portable and homogenous product is key to this perception, it is gold’s qualities as a non-liability bearing asset which have really shone through in the credit crisis.

Investors should remember when they take comfort in assets in their portfolio that these same assets are lurking on the liability side of a balance sheet somewhere else in the financial markets. It was the instability of each of these same balance sheets which caused so many ructions in financial markets. The key factor here is that gold is an asset to the investor and a liability to no one else, which is a highly distinctive quality.

In the context of recent events in the Middle East and North Africa, gold’s qualities as a ‘real asset’ again resonate well. With the outlook for currencies, monetary policy (and the banking system in some countries) in question, and likely to remain so for some time, local investors may start to cash in their accounts and move them into hard assets, such as gold.

This has happened at various times in the past and seems to be unfolding at the moment, with Egypt recently moving to ban all exports of gold. Indeed, it is rumoured that Iran has in the past used gold as a way of protecting itself against international sanctions.

An inflation hedge

Inflation is another key concern for investors. Although the effects of quantitative easing programmes remain uncertain, some argue they will be inflationary and will subsequently reduce paper currencies’ purchasing power.

As a result, investors are seeing gold as protection against both the ongoing inflationary concerns and the threat of fiat currency debasement. According to a recent report by Macquarie, gold has historically risen at more than 24% a year when US real short rates have been negative (they currently stand at -1.49%).

Central banks buy gold

It is not just individual investors who have been paying attention to gold lately. Many central banks have also started to buy gold in bulk. Several emerging economies (notably China, India and Russia) have been adding to their gold holdings, looking to diversify their rapidly growing foreign exchange reserves away from the dollar.

Moreover, European central banks, notable sellers of gold over the past few decades, have slowed their sales to a trickle. Central banks have thus gone from being gold net sellers to net buyers. It is estimated that central banks globally added a net 87 tons of gold to their reserves in 2010.