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 prices hovered near all-time highs this morning, further underlining the nervousness that continues to stalk markets and push investors towards haven assets.

This time, however, it was not the pandemic (or at least not only the pandemic) that was foremost on investors’ minds, but a worsening of diplomatic tensions between the US and China.

Last week the two economic giants engaged in tit-for-tat diplomatic measures against each other. On Tuesday of last week the US ordered the Chinese consulate in Houston, Texas, to be shut. This was answered by a Chinese order for the American consulate in Chengdu to close. There have also been sanctions against high-ranking Chinese officials and some Chinese students.

Equity market investors will worry that the diplomatic tension will spill over into renewed action on trade, where the two nations had apparently called a truce earlier this year.

The result was a retreat to the safety of gold, and prices were pushed to above $1,920 an ounce on Monday. The rise means gold has added around 25% this year.

Gold continues to divide investors, and the divide today is likely to be those pleased with themselves for having held the metal, and those cursing their decision not to. Gold entered the pandemic at multi-year highs, which will have put off many of those looking to buy the metal as a hedge against volatility. Barring a sell-off in March, it has continued to gain as lockdown has gone on and fears about recovery become firmer.

Conditions now put gold in something of a sweet spot. The metal is sometimes described as being an ‘end-of the world’ asset which does best when the outlook becomes very deflationary (because growth and prices is low or negative), or very inflationary (when prices risk running out of control). Right now gold look attractive because, while we have experienced low inflation and growth for more than a decade since the financial crisis, there is a credible risk that inflation could take off. The billions pumped into economies to stave off the effects of the pandemic could lead to sharp inflation if those measures work and growth returns to healthy levels in a recovery.

The traditional objection of many for holding gold - that it produces nothing productive or an income - is minimised right now because other investment assets like bonds and dividend paying shares have been yielding so little anyway. These are themes that were identified by Tigran Manukyan, a research analyst in Fidelity’s Multi-Asset team.

In a recent note he said: “Gold can have a reputation for being a short-term tool which traders use to speculate on the end of the world. After all, it is a cold metal with no cashflows like bonds and no inherent productive capability like equities.

“But this point of view risks missing the bigger picture - that gold is a store of value and its credentials justify a buy and hold approach for long-term investors.”

He added: “In today’s environment of negative real yields, buying zero-yielding gold seems like a fine way to wait out the status quo, whilst giving upside potential in the more extreme scenarios.”

As part of a balanced portfolio of equities, bonds, property and cash, precious metals offer a further way to make your investments more diversified. 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 these commodities?

There are two popular routes - either invest in the metal itself or the companies that mine it. An easy way to gain exposure to the movements of the gold price without having to buy and store actual gold bars 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.

Alternatively another option is to choose funds that actively invest in gold mining companies such as the Ninety One Global Gold Fund which features on our Select 50 list of preferred funds.

Five year performance

(%) As at 30 June 2015-2016 2016-2017 2017-2018 2018-2019 2019-2020
Gold 12.3 -6.9 0.2 12.1 25.7

Past performance is not a reliable indicator of future returns

Source: Refinitiv, total returns as at 30.6.20, in local currency

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.

Topics covered

GlobalGold; Interest rates

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