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.

2020 was a year that both validated and challenged the role of gold in a well-diversified portfolio. Traditionally viewed as a ‘safe haven’ that retains its value when other asset classes struggle, the precious metal stepped up to its task amid the first onset of Covid volatility with aplomb. Fast forward nine months, and gold has begun to lose some of its shine.

Massive stimulus packages and renewed animal spirits have seen its price fall from a record high above $2,000 per ounce in August to now sit around $1,850.

Meanwhile, a couple of tell-tale signs suggest the immediate prospects for the yellow metal don’t look all too positive.

The first is the US dollar. A strong dollar is bad for gold, since it makes the metal more expensive for those buying in other currencies. And while the dollar has been suffering of late, its price is likely to be held in check by higher US treasury yields and GDP growth. That’s bad news for gold.

The second is risk appetite. Continued fiscal and monetary support, ever rising valuations, widespread vaccine rollouts and positive earnings reports mean investors are increasing their exposure to risky assets at the expense of safe havens like gold.

Gold has also found its role tested by a new challenger. Bitcoin may not appear the likeliest of rivals but, in theory at least, the two assets might serve similar purposes. Bitcoin enthusiasts will tell you the cryptocurrency is something like a “digital gold”. It exhibits similar positives - it’s finite and relatively transactable - as well as some of the same drawbacks - it produces no income and is unlikely to become a mainstay currency.

All in all, it’s been a strange few months for gold. But it’s important to remember that while investor sentiment will always be fickle, the value of a lump of gold has remained relatively consistent for thousands of years. Precious yet durable, finite yet accessible enough to be traded, a bullion of gold is worth roughly the same now as it has always been. It has time and again proven itself able to withstand volatility while other assets rise and fall.

That’s why the best time to remember gold is when most investors have forgotten about it.

The challenges to the gold price listed above assume everything stays as it is and markets continue to go from strength to strength. That’s far from a given. Concerns are mounting that prices have strayed beyond reason and into bubble territory.

Even if equities can continue their forward momentum, a rise in inflation looks increasingly likely. Inflation would be bad news for traditional asset classes (bonds in particular), but good for gold, which would see its value rise at the expense of the dollar’s. It would also be unaffected by any change in interest rates while shares could suffer.

As for Bitcoin, the similarities between the two should not distract from the fundamental differences. The value of cryptocurrencies is almost entirely speculative. That is to say, whereas an asset like gold finds value in its commercial and industrial uses, Bitcoin’s lies solely in what people are willing to pay for it.

That’s why it’s particularly important not to conflate Bitcoin and gold. For all its pretences of being a safe haven, the major allure of Bitcoin lies in its risk properties. It has the potential to climb high but also to tumble sharply. It is not, yet, anything other than just another risky asset (a very risky one, in fact).

Gold has lost at least part of its lustre as a risky asset. But that was never where its primary appeal lay anyway. Rather, it’s best used as a hedge against volatility. That means that even when risk appetites are highest, there is always a good case for holding at least part of a balanced portfolio in gold.

Five year performance

As at 31 Dec
2015-2016 2016-2017 2017-2018 2018-2019 2019-2020
Gold 7.8 12.8 -2.8 18.0 21.0

Past performance is not a reliable indicator of future returns

Source: Refinitiv, returns in US dollar terms as at 31.12.20

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. 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:

Diversification; Gold; GlobalVolatility

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