Gold is down 6% year-to-date after a stellar 2020, throwing into question the role the yellow metal has to play in investor’s portfolio during an economic recovery.
According to BullionVault, the current price of gold per ounce in the bullion market is $1,823 (£1,311). It hit its five-year high of $2,067 in August 2020.
Gold, a traditional hedge against inflation has failed to reach the heights of last year, despite the seemingly accommodative environment in which it could thrive.
As such, Trustnet asked a selection of market commentators for their thoughts on why it was down this year and whether it can still play a useful role in portfolio construction and diversification.
Peter Sleep, senior investment manager at 7IM said he would not regard a 6% drop as anything extraordinary or that needs a “fundamental reassessment of your rationale for buying it in the first place.”
Gold usually performs well when the US dollar is weak and this year the currency has been relatively strong, despite concerns over rising inflation.
Sleep said new investors should only buy the yellow metal as a small part of a diversified portfolio of equities and bonds.
“I see commodities as weak investments for new investors,” he said. “They are bets against human ingenuity. The reason a new phone is so expensive is because of the value added by humans.”
He added that the operating system, apps on the phone, materials, science and research and development that goes into the components of the phone, is more valuable than the physical make-up.
“I would much rather invest in the companies that add value rather than speculate in commodities,” Sleep added.
Rob Morgan, pensions and investment analyst at Charles Stanley Direct said it made sense to have some investments in gold, particularly when interest rates on world currencies cannot keep up with the actual level of inflation.
He said while it offers some diversification it “produces no income and tends to be volatile, which can make it a hugely frustrating asset in the short term. Therefore the longer you hold, the less relevant and impactful the short term noise becomes.”
Given the market volatility and scale of monetary easing from central banks, gold surged in 2020, with the Bloomberg Gold Sub index up 17.2% over the year.
Performance of index over 2020
Source: FE Analytics
Morgan added that once the shock and awe of this wore off investors were left worrying that the price had got ahead of itself.
“Now the price has subsided we could be set up for a stronger period, though I would suggest having modest structural exposure to gold as some insurance rather than trying to tactically play it,” he said.
In terms of how to buy, the pensions and investment analyst recommended ‘physically-backed’ funds which own gold kept securely in a vault, as opposed to “derivatives-based funds where there is added risk and complexity.”
Performance of fund vs sector & benchmark over 3yrs
Source: FE Analytics
He opted for the iShares Physical Gold fund, which over three years has made a total return of 39.5% compared to 40.4% for its LBMA Gold Price index and 27.1% for the average fund in the Gbl ETF Commodity & Energy sector.
David Henry, investment manager at Quilter Cheviot, said investors holding gold for the long term should expect some short-term volatility.
“Valuations continue to be stretched and inflation concerns are becoming increasingly persistent. As such markets cannot be expected to continue to produce the returns many investors have become accustomed to. This makes owning gold as part of a portfolio a potentially prudent decision,” he said.
Henry recommended the Blackrock Gold and General fund as it provides a reasonable broad exposure to gold mining companies for “those who are comfortable with a more volatile, leveraged play on the gold price.”
Performance of fund vs sector & benchmark over 3yrs
Source: FE Analytics
Over three years, the £1.1bn fund made a total return of 52.5% compared to 57.8% for the FTSE Gold Mines index and 20.4% for the IA Specialist sector peer.
A prolonged period of high prices in commodities, or a ‘super-cycle’, has been predicted by some analysts – but whether this will affect gold remains to be seen.
“We should expect some commodities to benefit from the rise in infrastructure spending and the transition to net zero as things such as silver play more of a role in manufacturing process,” said Henry.
“However, gold is unlikely to be a beneficiary here.”