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Gold Price Retreat May Prolong Bull Run, Top U.K. Investor Says

Gold’s temporary retreat from record prices may help prolong the precious metal’s 11-year bull run as speculators abandon the market, the manager of the U.K.’s best-performing investment trust said.

“It wouldn’t surprise me at all if it went down, and there’s a small part of me that would welcome it, because it would make the long-term trend more sustainable,” said Will Smith, co-manager of the CQS Group’s City Natural Resources Trust. “We’re looking at speculative demand being washed out.”

Gold is in the 11th year of a bull market in London, the longest winning streak since at least 1920, as investors seek to diversify away from equities and some currencies. The metal is up 29 percent this year, outperforming global stocks, commodities and Treasuries. Bullion slipped 2.3 percent to $1,833 an ounce by 8:07 a.m., headed for a second daily decline after reaching a record $1,921.15 yesterday. Gold climbed 12 percent in August, its best monthly advance since November 2009.

Smith’s City Natural Resources High Yield trust was the U.K.’s best-performing investment trust with assets of more than 250 million pounds ($400 million) in 2010, returning 85 percent, according to data compiled by Morningstar Inc. The trust, which has about 262 million pounds of assets, is also the best in its 12-member peer group over the past three years, having risen 114 percent, Morningstar said. That beat BlackRock Inc.’s World Mining Trust, which returned 19 percent in the period.

“A move back down to $1,650 would make the trend much more sustainable,” said Smith, 51, who joined New City Investment Managers in 2008.

Smith, who holds about 29 percent of his fund in gold equities, sees gold stocks as the best way to respond to rising prices after they failed to match bullion’s performance.

‘Great Margins’

“Gold companies used to trade at big premiums -- not anymore,” Smith said. “The equities have great margins now. The generalist looking for earning momentum would have to look at the equities.”

Miners of precious metals are trading at their lowest share prices relative to profit in almost three years. The benchmark Philadelphia Gold & Silver Index of companies including Barrick Gold Corp., Newmont Mining Corp. and AngloGold Ashanti Ltd. traded as low as 14 times earnings last month, from an average of about 27 times profit in the past five years.

Smith expects bullion prices will continue to rise in the long term until there is a return to interest rates above inflation and growth in developed economies, and a “credible solution” is found to the sovereign debt and deficit crisis.

“In the absence of a solution to one, or preferably all of those, we feel that gold has got a really important part to play,” he said.

A slump in uranium stocks, along with mining equities, has dragged the fund about 15 percent lower this year. Uranium has plunged since an earthquake and tsunami triggered a nuclear meltdown in Japan in March. Companies that mine the ore make up about 13 percent of the fund.

“Right now can you have a sensible debate about uranium? It’s still a bit early,” said Smith. “We don’t see that a great deal has changed on the demand side. New mines are going to require higher prices quite frankly.”

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