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 prices have continued to rise sharply this year, recently hitting new all-time highs.
Last week, the price of one ounce of gold passed the $3,000 barrier for the first time, and for now, prices appear to be continuing this upward trajectory. Over the past year, the price of gold has risen by more than 40% — with a 17% gain in just the last three months.
What is causing these price rises?
This is being driven by investor demand amid economic and geopolitical uncertainty. The prospect of a tariff-led trade war has caused stock market volatility around the globe, a situation not helped by the ongoing war in Ukraine and tensions in the Middle East.
Gold has historically been seen as a ‘safe haven’ asset during times of turmoil. Gold prices, for example, rose in the aftermath of the 2008 global financial crash and Covid pandemic when share prices plummeted.
Wars and trade wars don’t just cause stock market sell-offs, they can also stoke inflation, which devalues cash, gilts, and bonds. These inflationary fears are also driving investor demand at present. Gold is a physical asset with a potentially finite supply, so it is seen as being better placed to hold its value during inflationary periods than these other assets.
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This, in part, explains the sharp rise in gold prices in 2011 when governments and central banks expanded quantitative easing programmes (in very basic terms, printing more money) to stimulate economies that were struggling with the fallout of the earlier financial crisis.
But it isn’t just investor behaviour that is fuelling this demand. The World Gold Council reports that central banks are also buying more gold, at almost double the rate they have done in the previous decade. Not only is this seen as an inflation hedge, but central banks are also looking to diversify assets rather than rely on dollar-heavy reserves. It is also noteworthy that while Western nations froze Russian assets following its invasion of Ukraine, they could not seize Russia’s gold reserves, as these were held inside the country. In an uncertain world it is not just individuals but countries that are seeking the relative security of gold.
Will these price rises continue?
No one can second-guess future market movements, be it for stock markets or gold prices. ‘Gold bugs’ — those who are keen buyers of the yellow metal — will point to the fact that inflationary factors are likely to persist in the current political climate. Lower interest rates and a weaker dollar can also support the gold price — as you need more dollars to buy the same notional ounce of gold. That said, price rises have been significant, and after the sudden rise in the price of any asset or commodity, there is always the danger of a correction.
It is worth remembering that after its 2011 peak (at $1,877 per ounce), gold prices fell for the next four years and did not surpass this previous peak until 2020.
Diversification options
For many ordinary investors, gold isn’t a panic buy during times of turmoil but a useful way to diversify a broader portfolio. As recent events have shown, there is little correlation between gold prices and equity and bond prices, so having a small allocation to gold can be an effective way of not keeping all your eggs in one basket.
Investors should remember there will also be periods where gold seriously underperforms other assets. They also need to know that gold does not deliver a regular income, so unlike shares and bonds (which can yield dividends and coupons), there will be no income during these periods of underperformance, unless investors gain exposure to this precious metal more indirectly via companies involved in the mining and/or manufacture of gold.
How do I invest in gold?
The ‘purest’ way to invest in gold is to buy bullion or coins directly. Here, investors own the physical asset, which either requires secure storage or paying a brokerage to hold this gold for them.
Many investors now choose to invest in a gold Exchange Traded Commodity (ETC), which effectively tracks the gold price. ETCs are structured like ETFs, so they have relatively low management fees and are easy to trade, with no storage concerns. In addition, ETFs can be held via ISA and SIPP structures.
Another option, also comparable for ISAs and SIPPs, is to invest in gold funds. These invest in a range of gold-related mining and manufacturing companies. While these funds don’t track the gold price directly, the underlying companies they invest in typically benefit from a buoyant gold price.
One advantage is that these companies may pay dividends, although there may also be some company-specific risks. Some investors may also want to look at wider commodity funds for additional diversification, which also invest in companies involved in the mining and trade of other precious metals or commodities.
Investing ideas
Fidelity’s Select 50 list contains two funds that provide gold exposure. They entail differing performance characteristics and levels of risk.
The iShares Physical Gold ETC has a very strong association with the price of gold. Fidelity’s experts like this exchange traded commodity (ETC) because it is underpinned by a physical entitlement to gold and because of BlackRock’s success in running this strategy for some time. The gold owned by this fund has been responsibly sourced.
The Ninety One Global Gold Fund, previously the Investec Global Gold Fund, invests in a worldwide portfolio of gold mining companies while also having the flexibility to buy physical gold funds and shares in companies that mine for other precious metals.
Generally speaking, investing in the shares of gold mining companies is advantageous when gold is trending 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 Ninety One Global Gold Fund has benefitted from these dynamics over the past three months.
This relationship doesn’t always work out. Smaller companies especially may need additional capital from shareholders to expand. Larger, more established companies may be under pressure to return money to shareholders by way of dividends or share buybacks. Or they may be on the acquisition trail, more focused on capturing market share than a high profit margin. Such factors mean the share price performances of gold miners can deviate significantly from changes in the gold price, especially over shorter periods.
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| (%) As at 28 Feb |
2020-2021 | 2021-2022 | 2022-2023 | 2023-2024 | 2024-2025 |
| Gold | 7.2 | 9.2 | -4.0 | 11.3 | 37.4 |
Past performance is not a reliable indicator of future returns
Source: Refinitiv, total returns in US$ terms from 28.2.20 to 28.2.25. Excludes initial charge.
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. Tax treatment depends on individual circumstances and all tax rules may change in the future. Withdrawals from a pension product will not be possible until you reach age 55 (57 from 2028). 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.
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