The £70m Mercury Gold & General Fund is benefiting from strong platinum and palladium prices, which ...
The £70m Mercury Gold & General Fund is benefiting from strong platinum and palladium prices, which are being complemented by the weak South African rand.
Managed by Graham Birch, of Merrill Lynch Investment Managers, 14.5% of the unit trust is invested in platinum mines, with key holdings being Impala and Anglo American.
He is expecting forthcoming half yearly results from these companies to be spectacular, following rallies in the price of platinum and palladium.
Palladium reached an all time high of $800oz earlier this year and is now trading at around $750oz. Platinum is now at around $570, which is its highest peak in more than 10 years.
These prices compare favourably to the start of 1997 when palladium was priced at $120oz, while platinum at that time was $370oz.
Birch said: "In addition to these strong prices, the weak South African rand has made returns more attractive. These companies are benefiting from high metal prices and a weak rand and therefore we are expecting they will deliver robust profit margins.
"The outlook for these companies is also promising because we have new uses for platinum, for example electronic fuel cells, making this metal a growth story as well. Additionally, platinum is becoming very fashionable as a jewellery metal."
The cheap price is another advantage, with companies trading at less than 10 times next year's earnings. Although share prices have gone up in line with earnings, there has not been a re-rating.
Gold prices, meanwhile have been wallowing, according to Birch. After a spike in the gold price following the Washington deal, whereby the European Central Bank agreed to limit the amount of gold that it would sell, the market has calmed down substantially.
Birch said: "The price has settled at around $278oz but is not as low as it was before the Washington deal. It must also be remembered the dollar has been strong over that period, so when looking at the gold price in terms of rand, euros, Australian and Canadian dollars, the gold price is not as bad as it first appears.
Birch said he invests in companies that do not adopt aggressive positions on currency.
He said: "We buy companies that don't have dangerously aggressive hedging strategies. Some companies hedge their strategies and aim to benefit from lower prices. The other side of that coin is that if the gold price goes up, then the hedge position can be negative. That's what hurt companies like Ashanti. We tend to shy away from those defensive companies and focus on those that don't have hedging strategies."
Birch has no exposure to exploration stocks within the portfolio, primarily because there are better opportunities among the producers.
In total, platinum accounts for 14.5% of the portfolio, diamonds account for 2.5% and the balance is in gold mining companies. There are 32 holdings in total.
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