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As good as gold

Jonathan Wright

Jonathan Wright - Fidelity Personal Investing

When markets become unsettled, many investors start looking at gold. Whether or not to invest in the yellow metal is a question that continues to polarise opinion. Loved by some for its safe-haven status, yet dismissed by others for its lack of income, the performance of gold this year has not been particularly rewarding for investors. Could that change?

Gold started the year rising strongly from around $1,240 an ounce in January to peak at around $1,350 in the Spring, only to fall heavily to under $1,200 in August. Since then it has bounced back, albeit slowly, to around $1,240, where it began the year.

In no particular order, the following have counted against gold this year. Firstly, a strong US dollar has reduced the international dollar price of gold. Secondly, inflation, the major source of concern around the beginning of this year, has remained largely grounded.

Thirdly, paper currencies – gold’s main rivals – have been looking stronger as markets anticipate an end to the quantitative easing introduced to rescue markets in the years following the global financial crisis.

However, as volatility made an unwelcome return to stock markets in October, gold’s traditional reputation as a safe haven, in conjunction with its lower price, boosted its appeal as a shelter from market turbulence.

The cheaper gold price has also attracted bargain hunters in the important jewellery market, where Indian and Chinese buyers account for around two thirds of global jewellery demand. According to the World Gold Council, Indian jewellery demand grew 10% in the third quarter, compared to the same period last year, thanks to its cheaper price.

When considering gold as an investment, it’s worth remembering that being a real asset, it has a finite supply. Central banks can’t simply print more when times get tough, as they can with paper currencies. It’s estimated that all of the gold ever mined in the world would fit into a 21 metre cube.

If gold does continue to rise into 2019, this is naturally good news for gold miners. When the gold price goes down, the share prices of gold miners tend to fall further as cuts to production costs have to be made 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 rapidly, which in turn boosts their share prices.

Diversification has been and always will be the watchword here. As part of a balanced portfolio of equities, bonds, property and cash, gold offers another route to diversification. Keeping a 5-10% proportion of a portfolio allocated to gold could be a sensible starting point. 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 this commodity?

There are two popular routes - either invest in gold itself or in gold mining companies. An easy way to gain exposure to the movements of the gold price without having to buy and store the physical metal 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, both available in a Fidelity ISA or pension.

Alternatively another option is to invest in funds that actively invest in gold mining companies such as the Investec Global Gold Fund which features on our Select 50 of preferred funds. This fund is also available in a tax-efficient ISA or pension wrapper.

Will next year prove to be a volatile ride for investors? Only time will tell. For those of us preferring a steadier journey, a diversified portfolio invested across a range of different assets, will always be worth its weight in gold.

More on investing in uncertain times

Five year performance

(%) As at 30 Nov

2013-2014

2014-2015

2015-2016

2016-2017

2017-2018

 Gold

-6.9

-8.8

10.2

8.7

-4.1

Past performance is not a reliable indicator of future returns

Source: Thomson Reuters Datastream, as at 30.11.18, in local currency with income reinvested

Important information

The value of investments and the income from them can go down as well as up, so you may not get back what you invest. The Select 50 is not a recommendation to buy or sell a fund. This information does not constitute investment advice and should not be used as the basis for any investment decision nor should it be treated as a recommendation for any investment. Investors should also note that the views expressed may no longer be current and may have already been acted upon by Fidelity. Fidelity Personal Investing does not give personal recommendations. If you are unsure about the suitability of an investment, you should speak to an authorised financial adviser.