Chris Forgan, Lead Portfolio Manager and Charlotte Harington, Assistant Portfolio Manager Fidelity Multi Asset Open range
Across the Fidelity Multi Asset Open range, gold has been an important asset and hedging component for the portfolios over the last few years. That thesis underpinning it has only strengthened in recent months and its unique properties make it well positioned to take advantage of the new world order we find ourselves in today.
Key points
- Gold has performed well since the US Federal Reserve’s pivot from tightening in the first quarter of 2019.
- We access gold by investing in both physical gold and equity securities of gold miners, which gives us a diverse play across the gold opportunity set.
- In our view, gold is in a strong position to protect against any potential selloff, and benefits from the major fiscal and monetary policy stimulus we have seen in recent months.
It’s been a bumpy ride
While gold has performed well since the US Federal Reserve’s pivot from tightening in January 2019, there was a period in March where gold sold off along with risk assets and other defensive assets. This goes against gold’s embedded characteristics, but we think that the unique circumstances at the time of that selloff are likely in the rear view.
This short selloff in gold took place during a major drawdown and liquidity crunch with investors selling anything and everything in order to obtain US dollars. Since then, funding costs have eased significantly and the extreme levels of volatility have eased. The physical commodity itself was impacted by coronavirus as well. The spread between gold futures and physical gold usually tracks closely but blew out wider over this period. There were disruptions to shipments, refining capacity constraints, and lower jewellery demand from India and China. But with the fading of these factors we see a return to normality and reduced likelihood of gold selling off with risk assets.
The case for gold
Most importantly, our view on gold is supported by the major policy responses from governments and central banks. Given the size of the monetary easing from global central banks, we see yields as likely to remain subdued. This is positive for gold as a non-yielding asset as lower yields reduces the opportunity cost of holding gold. Fiscal and monetary expansion is also likely to lead to currency debasement. With the US leading the world in expansionary policies, the conditions are ripe for some weakening of the US dollar. With gold primarily traded in dollars, weakness in the dollar means gold is cheaper to purchase for investors holding other currencies, and this increased demand helps push the price of gold higher. Finally, in the longer term the expansionary policies of governments and central banks may usher in a period of higher inflation; this would also be a positive for gold given its inflation hedging properties.
Like any investment there are risks to our thesis. Should there be a surprise consensus turn in sentiment based on positive news from the economic data, we could see gold come under pressure much like it did during the second half of 2016 and 2018.
How do we access gold?
We access gold by investing in both physical gold and equity securities of gold miners. Gold miners are much more volatile than physical gold and offer an opportunity for a leveraged play on the gold price. While gold miners have performed very strongly in recent weeks, we have taken some profits here in some of our Open range portfolios.
