Ruffer gold fund loses a third in 2011

The fund, which rose by 95 per cent in 2009 and 60 per cent in 2010, lost 32 per cent last year as gold equities lagged the runaway gold price.

However, fund manager David Baker said the fundamentals of gold equities have improved markedly, leading to very attractive valuations. “What seemed to be rhetoric surrounding dividend increases in late 2010 became reality last year, with a number of companies implementing gold and silver price-linked dividends,” he said.

“A more balanced attitude by company management to growth capital and the return of excess free cashflow to shareholders should ultimately make the sector attractive to investors prepared to take an active approach.”

Looking over last year, Mr Baker said gold lived up to its ‘safe-haven’ status against a tumultuous backdrop, surging from $1,420 (£896) per troy ounce at the end of 2010 to more than $1,900 in August.

It ended the year up 10.1 per cent, the 11th consecutive annual rise, and outperformed major equity indices.

In spite of the average gold price achieved by producers rising 28 per cent year-on-year, Mr Baker said the performance of the broader gold equities market was disappointing.

“The fund experienced its share of negative stock-specific events in 2011, which will always represent a short-term constraint due to the nature of its investments in companies developing new operations in an industry that remains stretched.”

In spite of this, he highlighted improved newsflow in the last quarter of 2011, with Resolute Mining for example – the fund’s largest holding – completing a transformation of its balance sheet. This involved reducing borrowings from $168m at the end of 2010 to just over $10m through capital discipline and strong operational cashflows.

Elsewhere, Yamana Gold, which will start up a number of new mines in the next two years, announced the debut gold pour at the first of these more than six months ahead of schedule.

Mr Baker said that while he expects the gold price to remain volatile in the coming months due to the uncertain geopolitical and economic outlook, long-term drivers remain intact.

“Given that austerity measures and efforts to control the deficits of European countries have had, in reality, minimal impact upon debt levels, further easing appears inevitable. Gold equities appear oversold, especially given the average price received by producers fell only 1.4 per cent in the last quarter. Producers remain very profitable and have robust balance sheets, and 2012 could see an increase in mergers and acquisitions.”