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.

November was a bad month for gold, with the metal posting its biggest monthly fall in price in four years.

Having peaked above $2,000 an ounce in August, gold is back down below $1,800 following a 6.1% fall in November. As investors have become more positive about economic growth, they have moved back into risk assets like shares at the expense of haven assets such as gold. The emergence of several viable vaccines for Covid-19 appears to have injected new optimism into investors’ minds and the fall in the gold price has coincided with gains for shares, including new highs for the S&P 500 and Dow Jones Industrial Average in the US.

These swings in asset prices reflect the big change in outlook that has occurred over the past few weeks. Added to the vaccine news is the change of US President, with markets apparently choosing to view the incoming Biden administration with optimism.

It appears, then, that gold seems likely to take a breather while the roll-out of vaccines and - we hope - lockdowns are eased. That doesn’t mean there’s not still some support for gold prices. The dollar is weak right now and that tends to boost gold prices as it becomes cheaper to foreign-currency buyers. Additionally, interest rates remain very low and inflation, while ticking higher, still sits below historically normal levels. That reduces the opportunity cost of holding gold.

What’s the right amount of gold?

Despite its recent falls, gold has done a good job of protecting investors this year, fulfilling its brief as a haven of last resort as fear took hold amidst the pandemic. Prices remain well above where they began before the outbreak in February and anyone who followed the maxim to ‘always hold gold’ is likely to be glad they did.

And if they have a properly balanced portfolio they will not despair at these recent price falls. Unless you’re trying to speculate on short term movements in the gold price, the metal’s primary role is as a diversifier for other assets. For most, the long-term growth in a portfolio will come not from gold but from shares and, with shares rising, investors’ losses on gold can be more than offset by gains elsewhere.

That’s what successful diversification is all about. You won’t make money on all your assets at the same time, and if you did it’s likely that your asset allocation is off-beam. Instead, diversifiers like gold will have periods when they make up the running, as they have for much of this year, until other assets are in a position to recover, and then they will fall back. The overall effect for investors should be that returns are smoother while still remaining positive in the long-term.

Many investors will still prefer not to hold gold at all. Their argument is that the asset in and of itself produces nothing productive, pays no income and is volatile. This year, however, has shown the value in holding it as a diversifier.

An allocation to gold at the margins of a portfolio - around 5% - is likely to be appropriate for most, but this, of course, really depends on your own preference and attitude to risk.

Fidelity’s 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 ETFs and shares in companies that mine for other precious metals.

More on Ninety One Global Gold Fund

Five year performance

As at 30 Nov

2015-2016 2016-2017 2017-2018 2018-2019 2019-2020
Gold 31.7 -0.5 1.1 17.7 14.0

Past performance is not a reliable indicator of future returns

Source: FE, as at 30.11.20, total returns in USD terms

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. 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:

Gold; Diversification; Investing principles

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