Merrill Says Its Gold Funds May Rise as Stocks Fall
>>Gold prices were also driven higher this year by mining companies buying back some of the 500 metric tons of metal they sold in advance in 1999 to lock in prices as gold dropped to a 20- year low of $252 an ounce, Davis said.<<
By Katsuyo Kuwako and Rajat Bhattacharya
Tokyo, July 11 (Bloomberg) -- Merrill Lynch Investment Managers Ltd. said its top gold fund, ranked No. 2 worldwide, may add to this year's 85 percent gain as a weaker dollar and falling stocks rekindle demand for the metal and shares in gold miners.
Merrill's International Gold & General Fund has beaten this year all but one rival fund that invests in gold miners and has outperformed benchmark indexes in Japan, Europe and the U.S. South African miners such as Gold Fields Ltd. and Harmony Gold Mining Co. and Australian rivals such as AurionGold Ltd. make up more than three-fifths of the $1.2 billion in Merrill's gold funds.
``We like to hold quite a lot of the South African producers such as Goldfields and Harmony because their profits will increase greatly for quite a small increase in the gold price,'' Richard Davis, who helps manage the funds, said in an interview.
Yesterday's 3.4 percent drop in the S&P 500 stock index to its lowest level since 1997 and this week's declines in European shares may be what Merrill Lynch and other gold fund managers need to win back investors who sold the funds as bullion fell from a 32- month high of $330.6 an ounce on June 4.
Merrill and some analysts expect the metal to rebound from the 4.8 percent decline since the early-June peak, as supply falls and a weaker dollar spurs investors to look for a safe haven.
``U.S. equity and dollar weakness is certainly going to help another rally in gold,'' said David Thurtell, who advises on commodities and currencies as an economist at Commonwealth Bank Of Australia. He sees gold recovering from the recent decline, to as much as $335 an ounce. Gold recently traded at $314.75.
ABN Amro Holding NV on Friday raised its forecast for the average gold price this year by 4 percent to $317.10 an ounce. It raised its forecast for next year by 5 percent to $315 an ounce. Gold has averaged $302.5 an ounce so far this year.
Africa
Other South African holdings in Merrill's funds are AngloGold Ltd., the world's third-biggest gold miner; Western Areas Gold Mining Co., which controls one of the world's biggest gold deposits; and Durban Roodepoort Deep Ltd.
The funds also own London-listed Randgold Resources Ltd., which has a mine in the African nation of Mali. In Peru, the funds include holdings in Compania de Minas Buenaventura SA, which runs Minera Yanacocha, ``one of the world's lowest cost mines,'' Davis said.
Merrill's flagship Gold & General Fund, started in 1988, has lost 10 percent of its net asset value in the past month, after rising to a record high on May 29. It has gained 70 percent this year in U.S. dollar terms. None of the funds hold physical gold or other metals.
AurionGold, which is fighting a $950 million bid by Canada's Placer Dome Inc., is among Merrill's holdings that have benefited from a series of takeovers.
Gold miners have spent more than $10 billion on mergers and acquisitions since last year to cut costs and acquire reserves to increase output. Newmont Mining Corp. became the world's biggest producer in February after it won a takeover battle with AngloGold, spending almost $7 billion to buy Australia's Normandy Mining Ltd. and Canada's Franco-Nevada Mining Corp.
``We expect mergers and acquisitions to continue because some of the larger companies have to maintain their resource base and for that they'll have to buy small companies,'' Davis said. ``That's because the gold price is too low to warrant exploration budgets to look for new ounces.''
Rebound?
Gold is having its best year since 1987, having gained 13 percent so far, as New York's Dow Jones Industrial Average lost 12 percent and London's FTSE 100 Index fell 17 percent. Tokyo's key Nikkei 225 Stock Average has gained 0.5 percent this year.
According to Bloomberg data, Merrill's top fund outperformed all rivals in its category barring the Sicav Placeuro Gold Mines fund managed by Sicav Placeuro Conseil SA, which has gained 91 percent in euro terms. U.S.-based Van Eck International Investors Gold Fund, which has returned 83 percent this year, is ranked third as of yesterday.
Merrill's World Gold Fund increased 80 percent this year, and its two Japan-based funds holding 22 billion yen ($185 million), have returned as much as 64 percent this year.
The price of gold halved since 1980 as an eightfold rise in the Standard & Poor's 500 index helped convince investors that U.S. securities offered better returns. This year the S&P has fallen 20 percent while the dollar lost 11 percent against the euro, encouraging investors to seek gold as a safer investment.
Currencies & Hedging
A stronger euro makes gold, which is sold in dollars, cheaper for European buyers. There is also a correlation between a stronger yen and higher gold prices as a stronger Japanese currency makes gold cheaper for Tokyo investors, Davis said. The dollar has lost more than 10 percent against the yen this year.
Violence in the Middle East, concern about terrorist attacks in the U.S. after Sept. 11 and accounting frauds at Enron Corp. and WorldCom Inc. have spurred the search for a haven.
Gold prices were also driven higher this year by mining companies buying back some of the 500 metric tons of metal they sold in advance in 1999 to lock in prices as gold dropped to a 20- year low of $252 an ounce, Davis said.
Demand has increased as a result of the closing of forward sales by the companies, Davis said. ``It represents a major shift in the psychology of the mining industry,'' he said.
South Africa's physical gold production last year fell to its lowest level since 1954, curbing supplies of the metal.
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