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Gold Still Shines as Investment to BlackRock

A recovery in jewelry demand and change in sentiment by central banks argue against a gold bubble.

NEW YORK (TheStreet) -- Gold prices may be streaking upward, but don't call it a bubble, says Evy Hambro, portfolio manager for the BlackRock World Gold Fund. In his view, the gold rush not only has the fundamentals to stand on, but the legs to run higher.

The $5 million fund, which launched in May, is up over 14% over the past month, better than 83% of its

Morningstar

(MORN) - Get Morningstar, Inc. Report

peers.

Welcome to TheStreet.com's Fund Manager Five Spot, where America's top mutual fund managers give their best stock picks and views on the market in a five-question format.

Will gold continue its run higher?

Hambro:

The recent highs have added fuel to the speculation that there's a bubble in the gold price. However, we believe that the fundamentals tell a different story. Demand is robust and supply is struggling to meet it; the gold price is well underpinned.

We are seeing a recovery in jewelry demand and, crucially, a change in sentiment by central banks. For many years central banks have been a source of gold supply to the market, but in the last year they have actually been net buyers of the yellow metal. Supply is also constrained. Mine supply peaked in 2001, new resources are harder to find, more expensive to exploit and are often found in areas of high political risk. Despite record capital expenditure on exploration in recent years, there has been an acute lack of significant increases to production.

Moreover, production costs will act as a floor to the gold price. We estimate total cost of gold production at $900 to $925 per ounce. Based on all this, we're positive on the outlook for gold.

Is it better to own the commodity directly like in the SPDR Gold Trust (GLD) - Get SPDR Gold Shares Report or the miners?

Hambro:

Long-run correlations between gold mining equities and the gold price are high. However, our funds invest in equities and we think there are firm advantages for doing so. Owning a miner gives you exposure to their operational leverage, growth potential as well as dividend payments. Owning gold obviously focuses return and risk on gold price alone.

What could pull prices lower?

Stabilization in the currency markets, improving global economic outlook, precisely the things that would be constructive for broader equity markets, could potentially dampen the gold price. Fundamentally, though, it is still well supported.

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What is your favorite gold mining stock?

Hambro:

We prefer not to talk about individual stocks. We do favor high quality, midcap names that are in production and have the potential to grow production in our portfolios.

If you can't give us a gold stock, how about a silver name?

Hambro:

Again, we don't like to comment in detail on individual names, however you can see from our top 10 holdings that we have a position in

Fresnillo

, a Mexican silver producer.

Video: What $1,300 Gold Prices Mean for Silver >>

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Reported by Gregg Greenberg in New York

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