UK Edition
Why 2018 is the year to buy gold
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 three interest rate rises this year and that if there were fewer, its price was likely to rise.
“Fewer than three increases in the next 12 months and gold is very likely to rise; more than three 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.”
How to invest
Investors who want to put some cash into gold can do so directly, buying gold bullion from a broker.
This is the purest way to get exposure to price changes in the metal, although investors may be nervous about storing and insuring their own gold bars, particularly in larger quantities.
Another option is to buy a gold “tracker” fund, a low-cost investment that mirrors the price 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 (exchange-traded commodity), which is sterling-based 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 50 gold mining companies, rose by just 5pc last year.
Among the options are two FTSE 100 companies, Randgold Resources and Fresnillo, which also has silver mines, as well as Centamin, which is in the FTSE 250 index.
Mr Mould added: “The world’s biggest gold miners are listed in the US. They are Barrick Gold, Newmont Mining and Franco-Nevada. Next on the list is Australia’s Newcrest Mining.
“Anyone 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.