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Should You Buy Randgold Resources Limited, Fresnillo Plc And Centamin PLC To Beat An Interest Rate Rise?

Rumours of a coming interest rate hike have been abounding of late, in the UK, USA and the eurozone — and it will happen, sooner or later.

When it does, the stock market is expected to take a bit of a tumble. Anything that makes interest-bearing investments look better will precipitate a movement of cash away from higher-risk shares — and such a shift could start to make gold look relatively more attractive.

The price of the shiny stuff plunged from a high of around $1,900 an ounce in August 2011 to less than $1,100 by mid-July this year, but since then it’s started to creep back up to reach $1,170 today — so it looks like some investors are already thinking about a shift. And if you’re pursuing glittery riches yourself, would it not make more sense to buy shares in gold miners instead and gear up any gain in the price?

Geared profits

Take Randgold Resources (LSE: RRS). At the interim stage this year it reported a cash cost per ounce of $684, so the current price of gold gives it a gross profit above that of $486. Now, suppose the gold price should rise by 10% to around $1,290 — the extra $117 would boost Randgold’s gross profit (in excess of cash cost) by 24% to $603 per ounce.

Total costs are higher than that, so Randgold’s bottom-line profit is even more highly geared, and a small percentage gold price rise would provide a higher percentage profit rise. In fact, the Randgold share price has ticked up 24% since a mid-September low, in response to a just a 7% gold price rise.

At Centamin (LSE: CEY) we’ve seen a 22% share price gain in the same timescale, with its cash cost of production a little higher at $706 per ounce. Production is rising steadily, with the third quarter of this year bringing a 13% increase over the same quarter in 2014. The firm confirmed its full-year production guidance at between 430,000 and 440,000 ounces — and an extra $117 from every ounce would be very nice indeed.

And over at Fresnillo (LSE: FRES) we’ve seen a 23% share price spike since the end of September, even though the company’s main product is silver. As it happens, silver prices have recovered a little too of late. But almost as a side product from its silver mining, Fresnillo also produced 364,000 ounces in the first half of 2015 and expects to unearth 715,000 to 730,000 ounces for the full year — with cash costs per ounce of around the $600-800 range (varying widely between the company’s mines).

Thanks, but no

But I still wouldn’t touch gold, or gold miners, as an investment — because the price of gold depends solely on human sentiment, and has no correlation with any real world use of the stuff whatsoever. Unlike oil, steel, and other commodities whose value comes from their actual utility, if all the world’s gold supplies disappeared in a puff of smoke tomorrow, most of our industries wouldn’t even notice.

That makes it a pure 100% gamble to me, and I don’t do that.

Besides, UK interest rates seem very likely to remain at current levels until at least a good way into 2016, and I reckon low rates are with us for a long time yet — the economic recovery is still very fragile, especially across the eurozone, and there’s no hint of any inflation that would need to be controlled.  Investment decisions should be made on the fundamental performance of companies, not on relative trivia like interest rates.

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Alan Oscroft has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.