BANGALORE With gold prices up nearly 16 percent to record highs since Standard & Poor's downgraded U.S. credit, and growing fears of a double-dip recession, the precious metal could go on to hit $3,000 an ounce within 2-3 years, said a portfolio manager at AGF Precious Metals Fund.
"Today, investors need to have exposure to gold and gold-related equities and stay the course, so that at least a small percentage of their portfolio is protected against the gyrations in the market," said Ani Markova.
Markova expects gold to hit $2,000 within 12 months and $2,400-$3,000 within 2-3 years. It's a stable commodity that cannot be altered by printing money, she said.
The price of gold has increased more than 40 percent in the last 12 months, and touched a record $1,813.79 on Thursday.
"We think this appreciation will continue, although we may get a little more volatile as we go forward. This is not the end of this rally," said Markova.
Gold's bull run is being driven by instability in the currency markets and "those are the trends we do not see going away in the near term," she said.
The AGF Precious Metals Fund has a 62 percent exposure to gold and 14 percent to silver. It also has investments in diamonds, copper, iron ore and some rare earth metals.
Freeport-McMoRan Copper & Gold Inc and Xstrata are some of the stocks the fund has invested in.
Markova, who sees gold as a hedge against uncertain markets, future inflation and any oil spike, said she is most likely to increase exposure to gold as it is a commodity that everybody is turning to, to preserve value and capital.
"We're taking some money out of basic materials and deploying it back into gold and silver," she said.
Gold producers are in the best position to realize cash flow from rising commodity prices, and that is why the fund's portfolio is focused on large and mid-tier companies producing cash, Markova said, adding that Eldorado Gold and Goldcorp are her preferred stocks.
She expects an increase in dividends to draw more investor attention to gold stocks.
Launched 18 years ago, the AGF Precious Metals Fund had total net assets of C$718.1 million as of end-June, a small chunk of the more than C$50 billion that AGF as a whole has under management.
In the three months to end-June, the fund was down 11.4 percent, underperforming the benchmark S&P/TSX Global Gold TR Index, which was down 8 percent.
While the broader index is dominated by large-caps such as Barrick Gold and Goldcorp, smaller caps have a larger weighting in the fund, which is a drag, Markova said. Only a third of the fund has investments in large-cap stocks.
Markova looks for companies early in their growth cycle. "We tend to find companies at an earlier stage and grow with them."
Belo Sun Mining Corp and Yukon-focused Kaminak Gold Corp are some of her favorites among the smaller, younger stocks.
While tough investments during periods of market volatility, these small caps can reap rich rewards when markets go up.
"These are the stocks in a rising market that would give you the 100, 200 or even 1,000 times return on your investment. Some of them grow to be producers," Markova said.
Markova sees silver as more of an industrial application, and is not looking to increase exposure for now.
Fortuna Silver Mines Inc and Mexican silver miner Fresnillo are among her favored stocks.
(Reporting by Bhaswati Mukhopadhyay and Maneesha Tiwari in Bangalore, Editing by Ian Geoghegan)