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Are we at the start of a new gold rush?

Jonathan Wright

Jonathan Wright - Fidelity Personal Investing

Precious metal prices have rallied this week on the back of further US/China trade tensions and central banks around the world cutting interest rates.

Are we at the start of a new gold rush?

Gold crossed the psychologically important $1,500 an ounce for the first time in over six years, while silver prices rose to their highest levels since June 2018, at over $17 an ounce.

The ongoing tit-for-tat trade disputes between the US and China have spooked markets, causing investors to rush to safe havens such as gold. But what’s really boosted precious metal prices is recent cuts to interest rates around the world, with the outlook of more to come.

At the beginning of August, the US made its first rate cut in a decade. This ‘dovish’ move by the Fed is in stark contrast to the beginning of 2019 when markets were expecting up to four rate rises over the course of the year.

This week the Reserve Bank of India followed suit, cutting interest rates for the fourth time this year, to its lowest rate in almost a decade.

Meanwhile the Reserve Bank of New Zealand surprised markets with a 50 basis point cut, against a forecast of 25bps and Thailand unexpectedly cut its rate on expectations its economy was likely to grow more slowly than previously expected.

So why are these cuts boosting the appeal of gold? Firstly rate cuts weaken a currency and a weaker US dollar makes the cost of buying the yellow metal (which is priced in dollars) cheaper in places like India and China.

Secondly, gold (and silver for that matter) pay no income. This means as rates decrease, holding your money in cash becomes less attractive compared to holding it in gold, as the interest you earn decreases.

Thirdly, and more importantly, precious metals are a real, tangible asset, with a finite supply. Unlike paper currencies, central banks can’t simply print more when times get tough. It’s estimated that all of the gold ever mined in the world would fit into a 21 metre cube. It can’t simply be created out of thin air.

If gold does continue to rise, it’s also good news for gold miners. When the gold price goes down, the share prices of gold miners tend to fall further as production costs have to be cut to make the same level of profit. However, if the gold price rises, and the miners are still able to dig it out of the ground with the same production costs, their profit margins can increase very rapidly.

Getting the balance right

As ever, diversification should always be central to an investor’s strategy. As part of a balanced portfolio of equities, bonds, property and cash, precious metals offer a further way to make your investments more diversified. This is especially relevant in this era of lower-for-longer interest rates, with yields on cash doing little to beat inflation over the long term. So how can investors access these commodities?

There are two popular routes - either invest in the metal itself or the companies that mine it. An easy way to gain exposure to the movements of the gold price without having to buy and store actual gold bars is through an exchange traded fund, otherwise known as an ETF. Like a tracker fund, these aim to track the gold price in a cost effective way. These include iShares Physical Gold ETC and ETFS Physical Gold ETC.

Alternatively another option is to choose funds that actively invest in gold mining companies such as the Investec Global Gold Fund which features on our Select 50 list of preferred funds. Emma-Lou Montgomery recently interviewed the fund’s manager, George Cheveley.

For those looking to track the price of silver, the ETFS Physical Silver is an ETF that does exactly that.

Five year performance

As at 31 July
2014-2015 2015-2016 2016-2017 2017-2018 2018-2019
Gold -15.1 23.0 -7.2 -4.1 15.9
Silver -28.8 26.7 -19.0 -8.2 4.5

Past performance is not a reliable indicator of future returns

Source: Refinitiv from 31.7.14 to 31.7.19. Price index in US dollars.

Important information The value of investments and the income from them can go down as well as up, so you may get back less than you invest. Select 50 is not a personal recommendation to buy or sell a fund. Investors should note that the views expressed may no longer be current and may have already been acted upon. Overseas investments will be affected by movements in currency exchange rates. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to an authorised financial adviser.

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