My gold has underperformed - will it recover?

Q: My gold ISA is the worst performing of 13 ISAs. What is the future for gold with all the happenings in the World?

The received wisdom when it comes to investing in gold is - one - that it will act as a safe haven at times of high uncertainty and - two - that it will hold its value in the face of inflation.

So let’s look at the last couple of years in that context. Have there been sources of uncertainty in the global economy? Tick - the war in Ukraine and now the Middle East to name just two. And has there been inflation? Tick - and lots of it.

So why haven’t your gold investments done better? I suspect there are two reasons - one which is specific to you and one which relates to the outside forces acting on gold.

In point of fact, the gold price today is only a whisker below its all-time high, and remains above $2,000 an ounce. But the price has only returned to this level after several years of moving sideways. It peaked above $2,000 all the way back in 2020 before dipping and eventually recovering to the level we see today.

The fact that you have not seen strong gains in your ISA suggests to me that you bought gold at a time when the price was already high.

But there have also been other forces putting downward pressure on gold. These have perhaps prevented it from breaking through its record level to set new highs, despite the otherwise favourable conditions of high uncertainty and high inflation.

As well as these factors, gold is also impacted by currency movements and the relative attractiveness of other assets. In terms of currency, gold is priced in dollars and the dollar has been strong relative to other currencies over the past two years. This makes gold more expensive on global markets, with the effect of reducing demand.

At the same time, interest rates have been high - as a measure to control the inflation - which has improved the attractiveness of many assets that pay an income, which gold does not. This has meant there has been an opportunity cost of holding gold - another drag on demand.

These factors can change in gold’s favour in the future. Interest rates should soon begin to fall, for example. The flipside is that inflation is coming down too. Later this year we will witness US elections and, perhaps, the return of Donald Trump to power. He has a track record of talking tough to trade partners around the world and this may provide a new source of uncertainty in the global economy - another potential reason for gold to rise.

It’s worth bearing in mind that it probably shouldn’t be the case that gold drives returns in your portfolio in the long term. If gold rises then it probably means trouble somewhere else in your portfolio. In times of rising stock markets - as we saw last year - it’s perhaps no surprise that gold has lagged.

Best to hold gold, at the margins of your portfolio, as a hedge against extreme markets conditions of various kinds. It hasn’t quite worked recently, but there’s nothing to say gold won’t prove its worth when the next crisis hits.

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