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Gold shines in fearful markets

Ed Monk

Ed Monk - Fidelity Personal Investing

Gold investors have benefited from a sharp spike in the price of the precious metal after fears over global share and bond markets sparked a flight to safety.

Gold shines in fearful markets

Gold is currently trading near 6-year highs following comments from US President Donald Trump that he would be “putting major additional sanctions on Iran”. That was in response to the flashpoint of Iran shooting down a US drone last week, the latest episode in the ongoing dispute between the countries.  The events also pushed oil prices higher as markets anticipated disrupted Middle Eastern supply.

But it isn’t just geopolitical events affecting gold right now. The price also reflects changing expectations for the value of the US dollar, which are being forced lower as the Federal Reserve becomes less bullish about raising interest rates. The relationship between rates and gold prices is contested but right now markets appear to be seeing lower growth in the US as good for gold.

It is another reminder of the metal’s role as a safe haven when markets get choppy. When the risk of extreme outcomes increase - be they inflationary or deflationary - gold tends to rise. It’s why many investors swear by the mantra “always hold gold”.

Not everyone agrees with that. The allure of gold is millennia old but there’s no real reason why it holds a value. It produces no income and doesn’t do all that much that’s useful, so many investors prefer to invest in assets that produce profits on a more reliable basis.

In weeks like this one, however, some exposure to the yellow metal seems like a sound policy.

Investec Global Gold, which features on our Select 50 list of favourite funds, gives this exposure by buying shares in gold mining companies, rather than in bullion.

The reason behind seeking out producers rather than the metal itself lies in the amplification effect a company can provide, especially when gold prices begin to rise. George Cheveley, the fund’s manager, explained to us last year: “A company producing gold has a lot of fixed costs, so as prices rise their profitability goes up by a faster rate than gold does. In addition to that, companies are clearly exploring, finding and hopefully producing more gold so you get growth in production and volume, which again increases profitability. Particularly in a rising gold price environment we can see companies improving their operations, producing more gold, and adding to potential returns.”

All of this means investors can benefit from growth in the price of the metal as well as the company producing it. Even in a flat gold price environment a miner can cut costs to increase their margins and reinvest earnings into the business for future growth.

There are even simpler ways to gain exposure to gold. The iShares Physical Gold ETC features on our Select ETF list of hand-picked ETFs, which can be bought and sold simply like a share.

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. 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.