Gold fallacy exposed: in fact the price when interest rates go up

It’s commonly thought that low interest rates are best for gold, but Laura Suter explodes the myth

Gold prices tend to rise after increases in interest rates, so 2018 could be the time to buy more of the precious metal. Typically, investors think that gold becomes less attractive as interest rates rise, as the income produced by other assets such as cash and bonds looks more attractive next to gold, which offers no yield.

Central banks in Britain, America and Europe are expected to raise interest rates in 2018, leading some to expect it to be a poor year for gold investment.

However, an analysis of market data shows that gold prices do not fall when rates rise: the theory is “a total fallacy”, according to Russ Mould, of AJ Bell, the investment shop.

The graph shows that gold prices have actually increased after rises in interest rates from the US Federal Reserve, America’s central bank.

“During the seven cycles of higher US interest rates the metal has on average gained 86pc between the first increase and the last – and gold is already up by 23pc since the first rise of this cycle, in December 2015,” Mr Mould said.

Gold currently stands at $1,321 an ounce, having started last year at around $1,133. This is still far below its near-term peak of $1,837 in 2011.

Ned Naylor-Leyland, a fund manager at Old Mutual Global Investors, said gold was typically oversold in the run-up to the Federal Reserve’s increases in interest rates as investors became nervous, causing the price to fall. However, immediately after the rate rise the price normally rallies, he said.

Mr Naylor-Leyland, who runs a gold fund, said the metal was currently priced for four interest rate rises this year and that if there were fewer, its price was likely to rise.

“Fewer than four increases in the next 12 months and gold is very likely to rise; more than four it will probably fall. I sense that the former is more probable,” he added.

“If there is a stock market fall of substance, or a ‘hot’ geopolitical event, one would reasonably expect one, two or even three of the possible rate rises to disappear from the curve very quickly.”

This year is also expected to see higher inflation in America – and gold is often bought as protection against that environment. As gold is not pegged to a currency and cannot be produced at the whim of central banks, it is seen to be inflation-proof.

Mr Mould said: “Gold is often seen as a hedge against inflation, or a store of value, and at the moment the ‘reflation’ trade is dominating financial markets, fuelled by hopes of an acceleration in global economic activity and Donald Trump’s recent tax cuts in particular.” Investors who want to put some cash sh into gold can do o so directly, buying g gold bullion from a broker. This is the purest est way to get exposure osure to price changes es in the metal, although ough investors may be nervous about storing and insuring their heir own gold bars, particularly cularly in larger quantities. es.

Another option on is to buy a gold “tracker” cker” fund, a low-cost investment stment that mirrors the price ce of gold.

Mr Mould tipped ETFS Physical Gold, which is priced in US dollars and costs 0.39pc a year, or the DB Physical Gold GBP Hedged ETC (exchangetraded commodity), which is sterlingbased and costs 0.69pc a year.

Another option if you don’t want to buy gold directly is to invest in gold mining companies.

While the gold price rose by 13pc last year in dollar terms, gold miners’ shares languished: the New York Stock Exchange’s Arca Gold Bugs Index, which includes inc 50 gold mining companies, rose by just 5pc 5p last year. Among Am the options are two FTSE F 100 companies, Randgold Rand Resources and Fresnillo, Fres which also has silver silv mines, as well as Centamin, Cen which is in the FTSE 250 index. Mr Mould added: ““T The world’s biggest gold go miners are listed li in the US. They are ar Barrick Gold, Ne Newmont Mining and Franco Franco-Nevada. Next on the list is Australia Australia’s Newcrest Mining. “Anyone resear researching gold diggers must run through a rigorous checklist to ensure that their selected miner is capable of benefiting if gold prices rise and weathering the storm if gold prices fall back again.” Funds that invest in a range of gold mining companies are also an option. Mr Mould tipped Smith & Williamson Global Gold & Resources, which has an annual charge of 0.72pc. Other options are BlackRock Gold & General, Investec Global Gold and Ruffer Gold.

Funds that invest in “value” stocks underperformed last year. Value stocks are typically out of favour and so inexpensive relative to the earnings they offer. These stocks surged at the end of 201, and helped the £1.1bn Schroder Recovery fund return 31pc – 20pc more than the FTSE 100 index.

However, last year’s performance was lacklustre and it returned 7.5pc compared with 13.8pc for its peer group. Brian Dennehy of Fund Expert, the investment shop, said: “I think this is a fantastic opportunity to buy an outstanding portfolio of UK value stocks.”

Emerging markets saw a similar story to value stocks, having a stellar 2016 before lagging last year. In 2016 the

THE WOODFORD CONUNDRUM

Veteran money manager Neil Woodford suffered bad press in 2017, with several of his biggest investment bets going seriously wrong. This led to a number of high-profile client defections.

Respected “multimanager” John Chatfeild-Roberts, of Jupiter Asset Management, had invested via his Merlin fund range with Mr Woodford for two The group of funds that invest in UK income stocks includes well-known names such as Neil Woodford (see below). The Threadneedle UK Equity Alpha Income fund came near the bottom among its peers for performance last year, returning 3pc to the FTSE 100’s 12pc. Mr Yearsley said the third of the fund allocated to domestically orientated companies had “been holding the fund back”. decades, but last year withdrew almost £1bn from his Income fund. He did not comment on why, but moved the money to rival firm Evenlode.

He was not alone, as Aviva, one of the largest savings providers in Britain, also dropped the equity income fund from its investment range. It cut the fund as an option for those who invest via company pension schemes, leading to a £30m withdrawal of money.

Respected fund commentator Mark Dampier, of Hargreaves Lansdown, is one of a number of analysts to remain faithful to Mr Woodford. He argued that Mr Woodford had had periods of poor performance before and recovered.

The fund remains on the 25 list of preferred funds.

Gold mine: 2018 could be the year to buy gold – or gold mining shares – as its price tends to rise when interest rates do