• In my recent interview with Ausbiz, I wanted to give my insights on prevailing economic trends, the Australian economy, and the equity market. Watch here

Is gold more attractive in a zero interest rate world?

Is gold more attractive in a zero interest rate world?

Many investors find a place in their portfolios for gold. It has the attraction of being tangible and difficult for governments to print.

A criticism sometimes levelled at gold is that it doesn’t do anything in terms of earning yield. It just sits there: a non-productive asset. In view of this, it is difficult to determine a value for gold, and correspondingly difficult to consider it a true investment. It is probably better thought of as a store of wealth – a place to park some of your capital, especially if you are reluctant to trust the government backing that gives most currencies their value.

In a world where yields are very low, the presses are humming, and the US dollar has been subdued, it is interesting to think about whether gold might enjoy greater support from the market. As shown in the chart below, the answer appears to be “not really”. The US$ gold price has been in gentle decline since 2011.

Screen Shot 2015-04-22 at 4.47.58 pmSource: Bloomberg

Some smart people have maintained that we should see higher gold prices in times of low real interest rates, and in US$ this should be even more apparent, so this outcome may be a little surprising. However, it is probably fair to say that the problem of forecasting gold prices is almost hopelessly intractable.

With equities, you can make a decent fist of estimating a company’s value, and then reasonably expect that over time the price might move closer to that value. As gold produces no cash flow, there seems to be no practical way to estimate its value, and therefore no way to know if the current price is higher or lower than that value.

Smart people will continue to set out well-reasoned arguments for why the gold price will rise or fall in years ahead. I will leave them to it and stick with assets that I can understand.

Tim Kelley is Montgomery’s Head of Research and the Portfolio Manager of The Montgomery Fund. To learn more about our funds please click here.


Tim joined Montgomery in July 2012 and is a senior member of the investment team. Prior to this, Tim was an Executive Director in the corporate advisory division of Gresham Partners, where he worked for 17 years. Tim focuses on quant investing and market-neutral strategies.

This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.

Why every investor should read Roger’s book VALUE.ABLE


find out more



  1. Yes gold is a hedge against government, banksters
    and negative interest rates.

    Gold Total 171,300 T 100%
    Jewellery 84,300 T 49.2%

    Investment (bars, coins) 33,000 T 19.26%
    Central banks 29,500 T 17.2%

    Industrial 20,800 T 12.14%

  2. Here’s an interesting exercise,

    Stop pricing things in currency ($AU or $US), and price things relative to hard assets. You’ll see that many things don’t go up, ever – seriously. It’s only because of QE that things go up, and where you are in the cycle means everything. It’s a new perspective, but one I have time for. Try researching this:

    Australian houses priced in gold/silver
    The Dow priced in gold, indeed all the major indices priced in gold/silver.

    If I had of known this before I had of bought, I might have waited till 200 ounces of gold bought me a reasonable home…But I might wait a very long time too…

    • An interesting point related to this: “In Roman times, an ounce of gold was enough to buy a quality tailored toga, sandals and accessories. During the Great Depression, an ounce of gold was enough to buy a quality tailor-made suit, shoes and accessories. Still today, an ounce of gold buys a great tailor-made suit, shoes, and accessories.” from http://www.miningaustralia.com.au/features/gold-and-the-reasons-to-own-it-infographic

      Personally I don’t like owning gold as an investment, but I do think there are some quality gold-miners out there which are worth owning. I realise TMF does like resources as they believe there’s no competitive advantages to be obtained (a point I strongly disagree on), but owning a high-quality mining company (bought at the right price) with good management, reserves, assets and balance sheet has all the positives of owning gold, buy with the potential cash flows and growth.

  3. James Chappell

    I’ve been thinking about what you’ve written here for the last few days and am being bugged by one issue in particular, forgive me if the following comes across as ramblings. At the Montgomery Fund you aim to purchase businesses at a discount to their intrinsic value. In essence you determine a companies intrinsic value based on how well they earn and reinvest money (currency)
    My question is this; isn’t fiat currency similar to gold in that it has no real value, and only exists because of peoples belief in everyone else’s belief that it is valuable. So going on the same premise as above regarding gold, assuming currency also has no intrinsic value, how can a company be valued correctly if the way you determine intrinsic value is to assess how well a business earns and reinvests something with no value.

    • Hi James,
      With companies its a bit easier because they produce cash flows denominated in some currency or another. If we estimate the value of the company in the same currency we don’t have to worry about what the currency is worth. We’re just trying to estimate how much of it the business will produce, and when, and then convert that into a single figure.

  4. Hi Tim,
    Thanks for a post on an interesting topic that never fails to produce conflicting and sometimes emotive opinions! I would answer the question you pose as yes. My personal view is that gold is a commodity like any other and therefore experiences varying levels of demand which in turn affects the price. I think that financial events (with no historical precedent over the past 30 years) have suppressed demand in the western world. My opinion (for what its worth) is that;
    1) the deregulation of the financial industry in the last 30 years has resulted in increased credit availability but some of the loosest credit worthiness standards in history;

    2) the gradual increase of debt (both public and private as % GDP) has incorporated a lot of non-productive debt resulting in many people (and countries) reaching their “peak borrowing ability” and;

    3) the gradual and continual decrease in interest rates (resulting in zero bound in most western countries) has aided in the ever growing debt burden and signalled what could be “peak debt”.

    I think the combined effect of all 3 factors over a relatively small time in history has resulted in overvalued equity and property markets in many countries when valued on a range of metrics on a historical basis. The question then is can the growth rates of the past continue without the ability to take on further debt going forward, or worse having to pay down debt if rates go up?

    I don’t believe that its correct to term gold as a hedge against the government as most governments, including our own are actually trying to cut down spending. The hedge is against central banks, which in theory are independent of the government, and which have created the most stimulative monetary environment in history by lowering interest rates and engaging in QE on an unprecedented scale.

    The million dollar question is how you view the success of QE to date the prospects of success you give QE in the future. If you are of the view that the past 6 years of central bank easy money have cured the problems of the past or will do so in the near future then you would not really need to think about gold.

    If on the other hand you are of the belief that the major economies of the US, Europe, Japan and China have only kicked the can down the road in terms of addressing the problem of too much debt, especially non-productive debt then gold should feature prominently in your portfolio.

    The reason is that gold has now become a hedge against the credibility of central bankers. These central bankers have created the current environment through a combination of monetary policy and soothing statements to induce people into financial assets on the assumption that increasing financial asset prices will stimulate the real economy. I think that we will have an answer to this question sooner rather than later!


  5. Tim I think you do understand gold as you pointed out, along with Dario, that gold is a hedge against govrnment. If the government is at threat of collapse then you can preserve your wealth in gold untill an alternative currency is available. However gold at the moment is acting simply as a commodity. All commodities are collapsing in price, iron ore, oil, zinc, copper. Look at the trends they are all down. This is why it is so important to understand that bonds are in a bubble, because when that bubble pops government will be under enormous pressure as interest rates rise particularly in Europe. This will be when gold will be revalued. I would also like to second Dario’s recommendation on Martin Armstrong. There is no better teacher on how the economy and markets function and the education that he offer’s for free is amazing!

  6. nevada cody salomonsson

    HI Again guys ,ok yes i think gold is a good alternative to cash especially in a low interest rate enviroment .. , its not an alternative to High quality global consumer staples like Kraft nestle coca-cola . but when every single nation Is printing money like cracy ,in order to create Inflation stimulate growth and or lower their currency , yes then i think gold is better than cash ,if you need to park your money someplace also most hyperinflation events come after deflationary events collapses , but money printing does not always cause inflation (Japan () yet !! ) I say that again yet ! ,, Why cause they have large % of older generation that don’t spend and they have blind faith in Japanese yen . no matter how much of it they print .. currency is based on faith you take my au$ Plastic notes but not my kids Monopoly money , why cause you have faith in the former .i don’t want to sound like a gold bug that lives in a bunker with gold and canned food guns and dober -man dogs . But a global currency crisis is not a high % probability , but it’s not a low % either .. In that case a global diversified multi national portfolio of large companies that humans need rely on in order to survive the best Way to go ,, and some gold and silver as alternative to cash .. I’m originally from Europe but I live in Australia and negativ interest rates sweden Germany you might as well put your $ under the mattress people are forced in to the realestate and equity markets globally now chasing yield ,, wich is not healthy . I do think R Montgomery post some time ago is correct their will prob be a boom in sharemarkets but it’s driven by pe expansion not earnings and dancing close to the door As Roger said might be the way to go ..
    As for gold companies they have performed horribly exept ( Nst) … slr kcn red bdr mml sar and the rest of the smaller ones they all been disasters ncm has done well of late but it was over 30 not long ago ncm is the only Gold miner in Australia I would buy because of its longer mine life copper exposure and fairly low cost of production ncm will most likely be around when gold is 3000 + however no guaranti they will be more profitable then than now cause then their costs will most likely be significantly higher
    Or they will mine the lowest grade possible or they will do another Lgl takeover paying a few billion to much very few goldminers can afford to pay decent consistent dividends similar to airlines . if ncm will produce 2.3-2.5 million oz at 500 margin they look ok
    To me at current aussie 1500-1550 gold price
    As a gold miner that is compared to the other gold shares cheers Cody

  7. Nevada,

    You do make sense. Like most asset classes, there is a time in the cycle to own gold, and your overall return is in part, determined at the cost of acquisition. Gold is a great hedge during periods of runaway inflation, as experienced periodically in those countries you mentioned.

    But the question posed was “Is gold more attractive in a zero interest rate world?” – so the answer is no. It has no cash flow – which gives it a zero interest rate. Its actually one of the worse investments you can make at this point in the cycle.

    Paradoxically though, the Aussie gold miners are humming along okay. Gold is priced in $US, so they’re benefiting from the tailwind of a weaker $AU. Crazy world eh?

  8. nevada cody salomonsson

    In 1997, Warren Buffet purchased 130 million troy ounces ca 4,000 metric tons of silver at approximately $4.50 per troy ounce On May 6, 2006, Buffet announced to shareholders that his company no longer held any silver.
    i remember reading an article were Warren explained how he reasoned and why he thought silver was cheap when he bought it 1997 .. warren was asked on a tv interview cnbc in 2011-12 ,,what he thought of gold he said he rather own all the farmland in 1 state than all the gold held in reserve …
    also again not fair to compare a dead non producing asset to farmland .. weeks later someone called and asked him ,, when he was doing a another.. tv interview if he rather own all the us currency supply or all the us gold reserves and hold for 20 years , and what he thought of gold as alternative to cash longer term ,,he never answered question but he said he does not like to hold cash longer term …

  9. Dario Petkovic

    True on 2 account, the obvious one that you can’t quantifiably value gold, it’s a subjective thing AND that its a hedge against GOVERNMENT! Check Martin Armstrong’s work

  10. nevada cody salomonsson

    Hi Tim ,, I am long term invested in real -gold and keep adding small amounts to my position .. have traded the paper-version of the metal for 13+ years . Every time i watch Bloomberg Cnbc or any business channel .. they always compare gold to equities ,, you cant do that you have to look at gold as an alternative to cash ., a sort of insurance against central banks,, its something you can put in a safety deposit box , or you can dig a hole and fill it with Krugerrand s .
    As an investment compared to shares of course gold will under-perform longer term ,, but its money its not shares ..if you lived in Zimbabwe Argentina Venezuela or even today’s Russia gold makes a hell of a lot of sense , and every country in the world is printing money like crazy . Many investors like to say im parking my money in the safety of cash well that depends i guess on currency country and banks .. a real value investor would never invest in gold-shares its similar to airlines worse in my opinion .. however parking a certain % in real gold as an alternative to paper $ ..in times of global currency wars and money printing and global debt is different . gold was cheap in 2001-2002 it was below cost of production ,every single miner was more or less hedged and banks were lending out their gold ,,
    gold is prob a hell of a lot cheaper now compared to then considering how much global fiat $ that has been created , . but take in to account all the money that has been created since then and it makes perfect sense to have some gold and you cant eat gold i know that but greenbacks or Aussie plastic fiat is pretty hard to swallow as well … some say you can value gold in comparing it to outstanding debt and currency in circulation also comparing gold to other assets in how many oz it takes to buy something ..but i agree its hard to value gold but one can make a case for that gold is cheap now ,also i think people are underestimating asian jewellery demand thick gold necklaces is becoming a sign of wealth in china there is still less than 1 oz per person in the world
    cheers cody
    sorry for bad spelling grammar commas and all that

    • Adrian Totols

      Dear Nevada Gaming Commission (or is that the old Bill),

      I note your comments that gold is a safe haven against central banks or INFLATION.

      The price of gold went from $400 per oz in March 2004 to $1800 an oz, before a pull back to $1400. A nice earner for gold as well as gold mining stocks. Equities will always beat direct gold as dividends (fully franked) are paid and if Reinvested will beat gold hands down.

      The comments on airlines, I note that may be in regards to airlines in the US around 2001, which went into bankruptcy. I note Qantas is doing well with oil around $55 a barrel.

      From memory, gold was dumped by The Australian Reserve Banks in the late 1990’s at $250 at oz. A very poor decision in the long run. I note gold was sitting under streets in Zurich, looted by Nazi’s from Jews in the Second World War was returned to relatives at this time.

      I note the spot price of gold increases at certain times of the year in relation to demand from India. I note some rich Indians eat a small amount of gold.

      The intrinsic value of gold has decreased, as well as platinum, but are still valued. I note a big diamond was shown recently, diamonds are a ”girls best friend”, however ”Diamonds are Forever”, and Montgomery has “Breakfast at Tiffanys”.

      In Tiffany’s blue, has just been superceded by Tigers Orange, as a fashion colour.

      A tip, use word to check spelling.

      Kind regards,

      Adrian Totolos.
      Business Analyst.

Post your comments