LONDON: Barings has been adding to gold miners in its global resources fund, believing that the gold price will stay elevated as investors seek safe havens, and that the under-performance of gold miners versus the gold price is unsustainable.
"We can see many reasons why the gold price will move higher," said Jonathan Blake, manager of the Baring Global Resources fund, which has some $968 million under management.
"As governments look to make their currencies more competitive, the debasement of fiat currencies will make gold an attractive destination for fund flows."
In an environment where investors are nervous and seeking safe havens he sees gold going to $2,000 an ounce and beyond "I don't think we are in a bubble," Blake said.
The fund is up 19.48 percent in the 12 months to end-August according to Lipper data, and has outperformed its peers in the Lipper Global Natural Resources Equity segment by 1.45 percent.
Blake targets gold miners able to grow their production or asset base, such as Randgold Resources Ltd, Kinross Gold Corp. and Centamin Egypt Ltd, and are looking for other attractively valued precious metals companies.
Although gold stocks have underperformed the gold price this year, he sees this as unsustainable. "There has to be a relationship between the performance of gold producers and the commodity, so that disconnect should narrow," he said.
"We won't see as close a correlation as we have in the past, but we should see some catch up."
Blake is defensively positioned given his outlook of sub-trend economic growth. This is partly expressed through the 17 percent allocation to precious metals stocks, but also through a small off-benchmark allocation to agriculture stocks.
"The grains and oil-seed markets look well supported," he said. "Agriculture is all about the weather and there have been some challenging growth conditions over the last two years."
This has kept prices high and encouraged farmers to maximise yields. Blake holds fertiliser stocks Potash Corp and Agrim Industries, which he said had performed well this year.
In the second quarter he added Iluka Resources Ltd, an Australian mineral sands company, which he sees as undervalued relative to its growth prospects.
This produces zircon, used in tiles and sanitaryware, and titanium, used in paint pigments, and which has benefited from rising emerging market demand for such products.
"Iluka is the biggest mineral sands producer in the world so they can set sizeable price increases to maximise their profitability," said Blake, adding that zircon had virtually doubled in price over the past year.
Blake said he avoids industries that are cost-takers and unable to pass these on: "So we have no exposure to steel companies as they require a strong demand backdrop to expand their margins."
Instead, he is focused on base metals where the BRIC economies are structurally short, such as iron ore and coking coal. Key holdings include Canadian coal miner Teck Resources Ltd., Rio Tinto PLC and Australian iron ore producer Fortescue Metals Group Ltd.
Copper miners such as First Quantum Minerals Ltd and PanAust Ltd, which have mines in South-East Asia and a venture with Codelco in Chile, are also of interest.
In the energy segment he holds oil services stocks such as Technip SA and exploration and production companies such as Tullow Oil PLC and Anadarko Petroleum Corp Blake sees Brent crude being fundamentally supported at between $90-$105 a barrel, and with high oil prices incentives asset owners to explore, demand for oil services should remain strong.
"Backlogs have increased and margins have improved you should see that come through in earnings over the next two to three years," he said.
Copyright Reuters, 2011