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.

Notwithstanding the unique times in which we now live, financial markets might appear, at first glance, to have reverted to type this summer. After staging an impressive recovery from low points in March, global equities appear to have lost some momentum, as they often seem to do around this time of year1.

That’s not for a lack of incentives to drive share prices one way or the other. Poised for the conclusion to a quarterly earnings season revealing in sharp relief the full impact of lockdown conditions on company revenues and profits, but still buoyed by expectations of an economic recovery in 2021, investors have much to be interested in.

Meanwhile, the continued rise of precious metals in limited supply – including gold, now within touching distance of its 2011 record high – reflects the low yields on competing assets and a desire among investors to proof investment portfolios against future economic and market shocks2. Gold also serves as a hedge against the inflationary effects of substantive government and central bank efforts to support the global economy.

Previous market shocks like the oil crisis and rampant inflation in the 1970s, the global financial crisis in 2008 and the policy interventions that followed have produced high water marks for gold and other precious metals before.

However, sharp interest rate cuts and central banks quantitative easing on an unprecedented scale after the global financial crisis importantly failed to trigger one major driver of precious metals prices – higher inflation.

In retrospect, we can see this was due to central banks focusing their efforts on bond purchases. This helped to inflate asset prices generally and assisted banks in repairing their broken balance sheets, but had limited knock-on effects for the real economy.

One question this time around is how much of the recent price movements of precious metals can be attributed to investors seeking safety in rarity and how much metals are moving to reflect expected improvements in demand when the world economy eventually moves up a gear.

Silver, as well as the so-called platinum group metals (PGMs) have significant industrial uses. Palladium, platinum and rhodium are all used in the catalytic converters of cars, for example. However it’s been silver recently – owing to its “green” credentials as an important component in solar panel photovoltaic cells – that’s whetted new appetites.

Copper may hold some clues. It’s a great counterpoint to gold, being widely seen as a positive barometer for the global economy. Thanks to its electrical and thermal conductivity, malleability and resistance to corrosion, copper is used almost everywhere, from water pipes and electrical cables to industrial machinery and coins. Copper prices hit a two-year high this week after China sucked in unwrought copper at a record pace in June3.

Higher inflation looks more likely than post 2008 because, this time, there has been a greater effort exerted to put money to work directly in the real economy. With banks considerably stronger than in 2008, governments have felt freer to direct cash and tax breaks directly to companies and workers.

The announcement this week of a €750 billion coronavirus rescue package for the eurozone exemplifies this new approach4. If ever there was a case to make for higher future inflation, we have it more or less right now.

So, yes, metals have the potential to work as a diversifier, especially if inflation rises to a point considered damaging to the prospects for equities and bonds. In less extreme conditions, precious metals – including silver – might still be expected to take part in a low inflationary economic recovery leaning towards a green agenda.

A gold mining fund can be a highly effective way to benefit from a rising gold price, and can act as a risk controller in an investment portfolio otherwise based on shares in other types of companies and bonds.

Fidelity has chosen one gold fund to include on its Select 50 list of favourite funds – the Ninety One Global Gold Fund. Better known, perhaps, under its previous name, Investec Global Gold, this fund invests in a diverse portfolio of gold mining companies worldwide while also having the flexibility to buy physical gold funds (gold ETFs) and shares in companies that mine for other precious metals.

Investing in the shares of gold mining companies has a potential advantage when gold is moving higher compared with investing in gold directly. Gold miners generally have high fixed costs, meaning that a small percentage rise in the price of gold can generate a disproportionately larger increase in gross mining profits. The main disadvantage is that gold mining funds are ultimately still paper assets and, in extremis, not as safe as holding physical gold in a bank vault.

While the Ninety One fund can buy other precious metals along with gold, there are other funds that are considerably more diversified across metals. One such fund bound to be attracting interest at the moment is Merian Gold and Silver. This fund invests in gold and silver bullion funds alongside shares in gold and silver mining companies. Exposures to the two metals are adjusted according to how the managers assess prevailing market conditions5.

Sources

1 Bloomberg
goldprice.org and kitco.com
mining.com
Deutsche Welle
5Merian Global Investors

Important information: Investors should note that the views expressed may no longer be current and may have already been acted upon. 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. Select 50 is not a personal recommendation to buy or sell a fund. 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.

Topics covered

Exchange-traded fundsFunds; GoldUK

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