Gold shares jumped by over 20% during the last month of the quarter, to give a return for the calendar year of around 100%. The yellow metal had always been widely regarded as a hedge in times of uncertainty, and with global equity markets slumping, concerns regarding the health of the global economy, and threats of a war in Iraq, both the physical metal price and gold equities have moved higher. Other favourable developments for the gold price over the past twelve months are still largely intact. These include certainty about central bank sales, outlook of falling mining production, dis-hedging by the producers and the risk of a weaker US dollar. The fund manager's thus believe that there is further room for gold to move higher. Following the recent surge in gold equity prices, these are looking fully valued.

There seems to be a number of distinct developments that have been working together in favour of gold at the moment: Much media attention has been paid recently to the surge in investment demand from Japan. While the gold price typically needs surging investment demand in order to move up strongly, this buying in Japan is still relatively small at this stage. Nevertheless, the potential for continued demand is huge, as the Japanese government is phasing out guarantees on (very substantial) deposits held with (fragile) domestic banks. Similarly, the US dollar looks likely to weaken further, which historically has been a catalyst for gold. On the supply side, the focus has shifted away from the threat of large, uncontrolled central bank sales, which had been depressing gold severely during the 1990s. Instead, there is now a feeling of predictability and stability due to the Washington Accord. Sentiment has improved markedly with the expectation that this agreement will be renewed at the end of 2004. Also positive is that global gold mining output has stopped growing and is expected to fall in the medium term. Last but not least, hedging levels are being reduced by many of the producers. As a result of higher gold prices and weaker producer currencies, many company hedge books have now become liabilities rather than assets. The low gold contango and a more positive outlook for the gold price are discouraging the miners from adding to their positions, with many actually delivering into their contracts. This means less supply is reaching the market. This fund has returned more than 140% in capital growth over the past twelve months. Based on historical ratings, gold shares are now very expensive and are discounting higher bullion prices. They could weaken if gold fails to perform, especially if the rand strengthens.

The shares held by this fund mirror the virtues of the bullion price. Fundamentally, there is a huge gap in the gold market between new mining supply on the one hand and jewellery fabrication demand on the other, with the latter exceeding new mining supply by nearly a thousand tonnes. Whether the market reaches a balance or not is entirely dependent on the action of the world's central banks, which hold approximately 14 years of new mining supply in their vaults. In recent years, central banks have been large net sellers, which has been depressing the price of gold. Of late, however, the fundamentals on the supply side seem to have improved somewhat. After a sharp curtailment of exploration spending, there are very few gold mining projects in the pipeline. New mining supply is therefore expected to shrink in the medium term. In addition, central banks have limited the amount of bullion that they are going to sell. Furthermore, the gold contango (difference between the Gold Lease Rate and the London-Inter-Bank-Office-Rate) has shrunk, making producer hedging much less attractive. This all bodes well for a recovery of the bullion price. Last but not least, South African gold producers are benefiting handsomely from the weakening Rand, because they receive all their proceeds in US Dollars, but have their costs based in Rands. The fund manager is expecting strong improvements in earnings to come through in 2002. The fund has been restructured somewhat, with a larger number of shares that are more geared to an improvement in the price of gold. The liquidity level remains low in order to allow for maximum upside.

Old Mutual Gold Fund's manager Michael Schroder has managed OMGF since 1993 has achieved a 620% gain in the fund's unit price. This achievement outpaced the 260% gain in both the index and Standard Bank's Gold Fund. Similar performance differentials are unlikely in the future as the number of gold price-driven shares have been reduced from 85 to about 10 over the past decade.

The Old Mutual Gold Fund was the second best performer over a one year period ending 31 March 2002 with a return of 149.79%.