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 is back proving its mettle once again this year as market uncertainty remains central to the investment outlook. Having begun the year at around $1,835, the gold price is back testing levels a little over the $2,000 mark1.
Recent turbulence in the banking sector in an environment of fragile world growth and still sticky inflation has seen investors returning to gold as a defensive measure. A weakening dollar since early March has also lifted the dollar price of gold.
While the final courses of inflation, interest rates and world growth have yet to be mapped out this year, risks to the downside for assets like shares and bonds clearly remain. In this type of environment, diversification remains an investor’s best ally and what better way to achieve this than through turning to the world’s oldest defensive asset?
Arriving at a ballpark figure for how much gold it’s appropriate to own in relation to other assets like shares, bonds and commodities isn’t always easy. That’s because it mostly depends on your risk tolerance as well as your overall financial goals.
Even so, if your investment aim is to help smooth out the short term returns from other financial assets, we could base a decision on a comparison between the size of the global gold market versus all of the other financial assets available to investors.
This approach looks reasonable, given that funds that invest globally often reference their exposures to an index that weights countries according to the sizes of their stock markets.
The Fidelity Index World Fund for instance – a consistently popular fund among Fidelity’s personal investors – replicates the country weights in the MSCI World Index.
It’s estimated that all of the gold ever mined would fit into a 22 metre cube. At today’s prices, that 209,000 tonne cube would be worth about US$13.5 trillion2.
That represents about 2.6% of the estimated $510 trillion held in financial assets by households, governments and non-financial organisations in 20203. So a similar percentage might seem a reasonable starting point for most investors to hold in gold, in the context of an already well diversified portfolio.
Two gold funds appear among Fidelity’s Select 50 list of favourite funds, entailing varying levels of risk. The Ninety One Global Gold Fund, previously the Investec Global Gold 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. Gold miners generally have high fixed costs, meaning that a small percentage rise in the price of gold can generate a disproportionately large increase in gross mining profits.
The main disadvantage of this approach is that gold mining funds are ultimately still paper assets and, in extremis, not as safe as holding physical gold in a bank vault.
The second gold fund among the Select 50 – the iShares Physical Gold ETC – has a closer association to the gold price and is backed by a physical gold entitlement. As such, it may not be the best fund to own when gold prices are on the up, but it may prove more defensive during periods when gold is out of favour.
Source:
1 KITCO, 12.04.23
2 World Gold Council, 08.02.23
3 McKinsey Global Institute, 15.11.21
April Investment Outlook – Send in your questions
The next Investment Outlook will be published on Wednesday 19 April. In this Outlook Tom Stevenson will provide his quarterly analysis of global markets and answer your questions in a pre-recorded video and podcast. If you would like to submit a question you can do so here.
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. 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 one of Fidelity’s advisers or an authorised financial adviser of your choice.
