Angus Rigby, chief executive of broker TD Waterhouse, feels that ‘It seems that investors have gone off the lure of gold. Gold prices fell sharply at the beginning of April, together with platinum, copper and silver, on the pressure of a rising US dollar, but it will be interesting to see how confident investors are in the months ahead.’

Resilient fundamentals
However, most managers focusing on the sector feel that this is only a temporary hiatus. Graham Birch, manager of the BlackRock ML Gold & General Fund, argues that ‘The recent highs in the gold price are supported by strong demand from investors fearful of the current banking climate. Furthermore, gold has a long history of providing a hedge against inflation, the weak US dollar and geopolitical tension.’

He adds, ‘Central banks in Asia and the Middle East, well known for storing US dollar reserves, have started to diversify away from the dollar, and it would not be surprising if some turned to gold as an alternative. Demand for gold jewellery may also grow in the long term as a prosperous middle class emerges in the developing world.’

Birch also reminds investors that ‘On the other side of the equation, gold mine production has been flat or declining since 2001. In the 1990s, the price of gold was kept low by central banks selling off substantial parts of their reserves, adding to supply. As gold prices fell, gold mining companies scaled back exploration and reduced spending on existing assets. Investment has not kept pace with the subsequent rise in the gold price, so new gold supply is hard to come by.’

And what of oil, the other key global industrial commodity, whose dollar price has been racing skywards? Steve Thornber, global equity manager at Threadneedle Investments, opines ‘Oil prices have been surprisingly strong and, having come through the winter with stronger prices, I see this continuing.’

He adds, ‘Seasonally, the fourth quarter is the weak quarter for oil, as summer demand passes and before heating oil picks up. Also, in light of the credit crunch and hedge fund unwinding, one would expect futures positions to be sold off again, thus causing oil price weakness. However, none of these factors has impacted upon oil prices. Rather, they have strengthened.

‘We continue to see production downgrades, particularly from Russia and Mexico. The company reporting season has indicated little or no volume growth from the majors. In the absence of a significant economic slowdown, and given ongoing demand from emerging markets, we believe oil prices look set to remain over US$100 and could spike higher on any fears of supply disruption.’

Sustained demand
Fund managers are still finding value in the mining sector. Sacha Sadan, manager of the Gartmore UK Growth Fund, points out that ‘Copper prices for forward delivery suggest no more than a modest decline between now and 2010. This contrasts sharply with the median expectation of analysts, who appear to be discounting a much sharper fall.’

He adds, ‘Continuing strong demand from developing countries and scant evidence of any collapse in demand in the West is evidence that the cycle for metals is likely to be significantly longer than the stock market is currently prepared to believe.’