Gold investing: five of your questions answered

Q. The price of gold has experienced big swings in both directions in recent weeks. Some Fidelity customers have expressed concern about the impact on their portfolios, writing to our Ask Fidelity service with questions about the metal’s prospects. Here is a flavour.

• Is gold more likely to fall or rise in the short term and what might drive moves in either direction?
• I have a gold ETF, should I be worried?
• I plan to reduce an existing ISA holding in the Ninety One Global Gold Fund. Which Fidelity Select 50 options are worth considering as alternative investments?
• What are the prospects for – and possible consequences of – a partial replacement of the dollar by gold, other currencies or even cryptocurrencies?
• Could pricing indices such as the S&P 500 or FTSE 100 in gold rather than their respective national currencies might show their gains of recent years to be just ‘smoke and mirrors’?

A. Our readers’ questions were received before the start of the conflict in the Middle East on Saturday, since when the gold price has risen, if not dramatically. Gold is a traditional ‘safe haven’ in volatile times and it would be reasonable to expect the price to remain elevated for as long as the conflict lasts.

What about beyond that? Is, as our reader asked, the price more likely to fall or rise? We simply don’t know; financial markets reflect current facts and investors’ interpretations of those facts, both of which evolve constantly and unpredictably. We can, however, identify certain factors that will tend to push the price higher and others that will tend to do the opposite.

Among the former are fears of inflation – against which gold is seen as the traditional hedge – prompted by spendthrift governments and possible economic disruption by tariffs and now by the Middle East conflict. Another is the fear, mentioned by one reader, that the old currency order based on the dollar may start to break down. It seems clear that some countries were alarmed when America froze Russian assets after the invasion of Ukraine and started to diversify their reserves away from the dollar. Some of that money has flowed into gold and patient accumulation of bullion by central banks could well continue for some time, supporting the price.

Another important, although not widely appreciated, development is the increasing, if still limited, use of currencies other than the dollar in international transactions such as oil purchases. This could in time not only erode the dollar’s status as ‘the world’s currency’ but lead to flows of dollars previously earmarked for oil purchases into new, if unpredictable, directions. In view of the sums involved, the ramifications for investment markets, including gold, could become significant over time.

In short, structural shifts in the monetary system could support gold, but their timing and scale are uncertain.

On the other side of the argument, gold pays no income and so it is impossible to value by reference to cash flows, in the way that shares and bonds can be. If interest rates have to rise in future to counteract inflation, the ‘opportunity cost’ of holding gold relative to income-generating cash and bonds increases. On top of that, some at least of the recent buying is bound to have been speculative – people bought because they saw the price going up – and vulnerable to an equally rapid reversal in sentiment.

So, should we, as our reader asked, be worried by gold’s volatility, especially after its severe fall at the end of last month? Much depends on how much gold you own and what else is in your portfolio.

There are sound reasons, based on its long record of wealth preservation in turbulent times, to include some gold as part of a diversified portfolio. But putting all your money in gold would be as unwise as betting the farm on any other single asset. Once you’ve decided to have, for example, 10% of your portfolio in gold, it makes sense to maintain that level by periodic rebalancing: taking profits after a rise in the price or topping up the holding after a fall.

Such rebalancing is what the reader who holds the Ninety One Global Gold Fund is contemplating after gold’s strong run. If that money is to be reinvested under a broadly ‘wealth preservation’ remit, the Fidelity Select 50 can offer the Pyrford Global Total Return Fund, which seeks to provide a stable stream of real total returns over the long term with low absolute volatility and significant downside protection.

Infrastructure assets also tend to offer relatively stable returns and there are two infrastructure funds in the Select 50. One, First Sentier Global Listed Infrastructure Fund, holds shares in power companies, railways and the like, while International Public Partnerships holds infrastructure assets directly.

Finally, there is the reader who asked, provocatively but pertinently, whether expressing stock market indices in gold rather than currencies such as the pound or dollar would make recent gains appear illusory.

I have seen a graph, produced by the respected economics consultancy Gavekal, that plots the S&P 500 index relative to the price of gold since 1920. In effect, it shows how many ounces of gold you would need to buy one unit of the index. The current level of the graph is no higher than in the late 1970s, suggesting that, measured in gold, the market has failed to gain since then. It also shows that, priced in gold, the index has been broadly static since about 2018, which supports our reader’s contention. But the longer-term trend is more positive: since 1920 the index in gold terms has risen about fourfold.

Got a burning question you want to ask? Why not drop us a line. Click here to ask your question.

• Read: Where next for gold?
• Read: 4 growth funds for your ISA
• Read: 4 income funds for your ISA

Important information - investors should note that the views expressed may no longer be current and may have already been acted upon. Before investing into a fund, please read the relevant key information document which contains important information about the fund. For full five year performance figures please refer to the fund’s factsheet. Eligibility to invest in a SIPP or ISA and tax treatment depends on personal circumstances and all tax rules may change in the future. Withdrawals from a SIPP will not normally be possible until you reach age 55 (57 from 2028). Overseas investments will be affected by movements in currency exchange rates. Investments in emerging markets can be more volatile than other more developed markets. Reference to specific securities should not be construed as a recommendation to buy or sell these securities and is included for the purposes of illustration only. Shares in the International Public Partnerships investment trust are listed on the London Stock Exchange and their price is affected by supply and demand. The trust can gain additional exposure to the market, known as gearing, potentially increasing volatility. 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 one of Fidelity’s advisers or an authorised financial adviser of your choice.