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7IM buys gold for first time in three years

7IM buys gold for first time in three years

Fears an “inflation surprise” could hit markets have prompted Seven Investment Management’s (7IM) multi-asset team to seek out havens in gold and inflation-protected Treasuries.

Ben Kumar, an investment manager who works on the firm’s four-strong multi-manager range, warned more aggressive levels of inflation could emerge, to the surprise of markets and central banks.

In anticipation of this move, 7IM has allocated to gold for the first time in three years, establishing a 3 per cent position in its £670m Balanced portfolio at the expense of Japanese equity exposure.

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The team has also increased its allocation to US inflation-linked bonds from 2 per cent to 8 per cent, funded from cash weightings.

“People aren’t prepared for inflation to come through anywhere in the world,” Mr Kumar said.

“I’m not sure we will see real inflation in Japan for a long time. But the US is seeing wage inflation coming through – the services sector is seeing huge wage inflation.

“The negative feed-through effect from commodities should [also] be fading away. It might not be positive, but less of a negative. You will see investors react when we get an inflation surprise.”

US inflation expectations remain subdued despite the US Federal Reserve having raised its interest rate in December, but there are signs of an uptick in prices.

The core inflation rate, which excludes energy costs, rose to 2.3 per cent in February, its highest level since May 2013.

However, headline inflation remains half the Fed’s 2 per cent target. Chair Janet Yellen said last month that the central bank expected its target to be reached only within “two to three years”.

Mr Kumar thought a shock could prompt investors to flock to haven assets amid worries of a central bank overreaction.

“If you get an inflation surprise, people worry that the Fed’s behind the curve and has to raise rates [aggressively],” he explained.

Renewed interest from investors pushed the gold price to a 12-month high of $1,268 early last month.

“The reason [the price] ran up in the first quarter was because interest rates were negative,” Mr Kumar said.

“The opportunity cost for holding gold has gone now you have to pay to lend to the German government for five years.

“We think gold’s going to do quite well if an inflation surprise comes through.”

Mr Kumar is not the first to express concerns about inflation figures and their impact on markets.

Last month M&G bond manager Ben Lord cautioned the US would be most exposed once the oil price stabilised.

“When this happens, the rebound in US inflation will exceed that seen in Europe or the UK,” Mr Lord said.

Meanwhile, the managers of the £1.4bn Henderson UK Absolute Return fund have aired concerns of another ‘taper tantrum’ as the impact of significant oil price declines falls out of annualised inflation readings.

Luke Newman, who runs the long/short equity fund alongside Ben Wallace, said: “Normally I wouldn’t be worried, but in a volatile market you may have people saying, ‘the Federal Reserve has been too slow [in hiking rates], it’s a policy error’, and bonds selling off.”