Gold: Golden opportunity or past its peak? – Fidelity

Fidelity’s Nick Peters explains why he has added gold to portfolio.

Key Quotes

“Five years ago today, gold reached an all-time high of $1,913. While the precious metal disappointed in the subsequent five years, it has rallied in 2016, rising by around a quarter since the start of the year.  Gold has outperformed several major asset classes, but still remains some way off those highs it reached in August 2011.

Nick Peters, Portfolio Manager at Fidelity Multi Asset, considers whether we could see continued strong performance, or whether this year’s price rises are simply a short-term bounce.

He comments: “Many investors have looked to add to gold on the back of fears over global growth, with worries over a slowdown in China particularly prevalent at the beginning of the year. The impact of these fears can be seen on the gold price over 2016, with a sharp leg up occurring at the height of market panic in the second half of January.

“Gold has benefited just as much from an easing in headwinds as any support from jittery investors. The Fed’s adoption of a more dovish stance at the beginning of the year resulted in an easing of the strong dollar trend, normally a headwind to the gold price. With yields expected to remain lower for longer, the traditional drawback of gold, that it yields nothing, is less of an issue. However, there are those who believe that gold will only perform in a negative real yield environment – i.e. where inflation is higher than yield levels – and we’re not quite there yet.”

Has the opportunity passed?

“Although we have seen a significant rally in gold, I think investors should still consider an allocation to the precious metal. Gold can function as a safe haven during times of market volatility and provide strong countervailing returns to equities. This is useful when many equity markets look expensive. In recent months, equities have been driven more by expectations of lower for longer central bank policy rather than the tentative improvement in economic fundamentals. While momentum driven rallies can sustain themselves for some time, equities are now vulnerable to a change in the market narrative. It’s not implausible that we see a repeat of the volatility that occurred in early 2016 or indeed around this time last year. As a store of value, gold can also offer protection if we see a pick-up in inflation.

“It can be hard to identify good entry points for gold. Changes in the gold price are more closely linked to sentiment than fundamentals like the balance between supply and demand. However, investors may now be looking to now increase their structural holdings to gold, in order to protect against market volatility. As structural positions, they are unlikely to be sold in a hurry, although this assumption needs to be watched closely as changes in sentiment and the growth outlook fluctuate.

“In terms of my own portfolios, I recently added a gold position in two of my multi asset total return funds. This should provide a strong source of countervailing returns to equities if we see further volatility and allows the funds to continue seeking capital growth opportunities in what remains an uncertain environment.”