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.

Gold undoubtedly had a good 2020, gaining about a fifth in value¹. Somewhat unusually it moved in tandem with stock markets for much of the year, after the latter had registered big falls in March. Lately though that rally has petered out, raising questions about gold’s continuing ability to live up to its status as a safe haven, inflation hedge and ultimate “reserve currency”, even as central banks continue to print paper money at a breathtaking pace.

The recent fortunes of bitcoin could hardly have been more different. The world’s number-one crypto currency has continued to forge ahead, its upward trend broken only by a short-lived, though characteristically dramatic correction in late February². The persistent rise of bitcoin during the pandemic has raised the opposite question facing gold, namely, is crypto currency now the main challenger to the US dollar when danger pervades financial markets?

Crypto currencies certainly look as if they’re here to stay. It makes a lot of sense to have them in an increasingly digitised world. While bitcoin has a strong tendency to polarise opinion, it has now gained acceptance among some of the world’s largest financial institutions and payments companies. MasterCard, for instance, has said it will begin supporting crypto currencies on its network later this year³. PayPal already allows eligible users to buy, sell and hold bitcoin in the US and expects to roll out its service in other territories soon⁴.

Bitcoin benefits from the great advantage of finite supply – only 21 million bitcoins will ever be put into circulation and around 18.6 million of them are already out there⁵. Even gold, whose supply is severely limited, can’t beat that. Bitcoin also has the added advantage of being beyond the control of governments and central banks, meaning that its price cannot be manipulated by governing institutions seeking a particular exchange rate.

Gold, however, has a very long-term track record of behaving as a hedge against economic and financial stress. This was demonstrated yet again during the global financial crisis of 2008, the ensuing European debt crisis and, most recently during Covid.

It’s also less volatile, admittedly not to the benefit of investors so far this year. For bitcoin, volatility is a major stumbling block. A basic requirement of a currency is that it provides some kind of certainty for its users about the actual price a future transaction will be conducted at in terms they can equate to their income and wealth.

A safe haven, meanwhile, implies some sort of proven protection from adverse events elsewhere. Given its historic volatility – including an 80% retracement in 2018-19 – bitcoin isn’t quite there yet⁶.

Investors will, no doubt, make up their own minds about the advantages and potential pitfalls of crypto currencies. While the fundamentals supporting bitcoin are persuasive, the big downside risk – for the time being – is that speculative trading activity creates too many instances where fortunes can be won or lost and may already have driven prices to unrealistic levels (US$48,000 at the time of writing).

Gold, on the other hand, is much more likely to give a stable ride within limits and act as a safety valve in the context of an investment portfolio comprised of shares and bonds. It also has the capacity to provide some protection against inflation, an important consideration in today’s investing environment.

The link between gold and inflation isn’t always precise. Periods of financial stress during which gold has performed well in the past have often also been times of very low inflation – for example, the financial crisis in 2008 and again in 2020 – as well periods of hyper inflation in the 1970s.

However, the list of potentially inflationary events is now quite long and largely of the type likely to catalyse a rise in demand for gold. Large scale government spending programmes in the wake of the pandemic, a Chinese economy back close to pre-pandemic levels of activity, rising commodity prices and an anticipated release of pent-up consumer demand once lockdowns get lifted all point to inflation rising at some point over the next year.

The fact that a large part of this additional spending will be paid for with paper currencies that devalue against gold every time a new note rolls off the press reinforces the gold environment.

One gold fund populates Fidelity’s 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 ETFs and shares in companies that mine for other precious metals.

A gold mining fund is, ultimately, a paper asset so would fall short of physical gold in an “end of the world” environment. In all other circumstances though it can be a highly effective way to benefit from a rising gold price, and can act as a risk controller in a portfolio of shares and bonds.

Five year performance

(%)
As at 28 Feb

2016-2017 2017-2018 2018-2019 2019-2020 2020-2021
Bitcoin 285.8 867.5 -62.2 219.7 529.4
Gold 4.2 6.4 -3.1 15.6 8.7

Past performance is not a reliable indicator of future returns
Source: Refinitiv, returns in US dollar terms as at 28.2.21

Source:

¹ Bloomberg, 31.12.2
² dailyfx.com
³ MasterCard, 10.02.21
⁴ PayPal.com, March 2021
⁵ Blockchain.com, 03.03.21
⁶ bitcoincharts.com, 04.03.21

Important information

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. Investments in emerging markets can be more volatile than other more developed markets. 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.

 

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