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Going for gold

Jonathan Wright

Jonathan Wright - Fidelity Personal Investing

When investors start to become nervous, gold becomes a traditional port in the storm.

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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, gold has been enjoying a bit of a comeback this year.

Over the last 12 months gold has risen from a trough last September of around $1,200 an ounce, to over $1,400 recently - an increase of over 16%.

The main reason for the rise is the prospect that the Fed may cut interest rates, which would cause the dollar to decrease in value relative to other currencies. At the start of the year, markets were expecting the Fed to raise rates. This about-turn has provided a boost to gold prices, as a weaker US currency makes the costs of buying the precious metal (which is priced in dollars) cheaper in places like India and China.

Add to that, the ongoing trade tensions between the US and China and geo-political events in the Middle East, it’s easy to see why some investors are opting for some safety in their portfolios.

When considering gold as an investment, it’s worth remembering that being a real asset, it has a finite supply. Unlike paper currencies, central banks can’t simply print more when times get tough. 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, it’s 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.

Getting the balance right

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.

With stock markets close to record highs, at some stage we can expect a bumpier ride. 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.

Five year performance

(%)
As at 30 June
2014-2015 2015-2016 2016-2017 2017-2018 2018-2019
Gold -12.2 15.1 -9.1 1.8 14.2

Past performance is not a reliable indicator of future returns

Source: Refinitiv from 30.6.14 to 30.6.19. Price index in US dollars.

 

Tom Stevenson’s Investment Outlook webcast – 10 July 2019 at 12pm
Tomorrow, Tom Stevenson will be giving his outlook on world markets in a lunchtime webcast.
Login here to watch it live at 12pm on 10 July 2019.

Important information

The value of investments and the income from them can go down as well as up, so you may get back less than you invest. Select 50 is not a personal recommendation to buy or sell a fund. Investors should note that the views expressed may no longer be current and may have already been acted upon. Overseas investments will be affected by movements in currency exchange rates. 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 an authorised financial adviser.