For thousands of years, gold has been something investors buy to store value. Whether in the form of jewellery, ETFs or bars and coins, gold has long been an asset used to protect against the consequences of a financial crisis or inflation.

Technically, says Morningstar analyst Alex Bryan, gold is only worth what someone else is willing to pay for it—but in reality, it has a proven track record as a safe haven to preserve wealth. The gold price has grown on average 11% a year over the past 20 years, outpacing both the consumer price index (inflation) and cash savings.

As with previous recessions, gold drew attention at the start of the Covid crisis, which began at a time where the supply chain was already struggling to get enough raw materials to satisfy demand. This led to substantial price growth. However, during a recent Royal Mint webinar, analyst Stuart O’Reilly noted that gold’s rally predates the pandemic - the price of the yellow metal climbed 18% against the US dollar in 2019. He adds, however, that following a crisis, the gold price tend to stabilise at a higher level.

Gold Indices Growth Graph

Several factors have affected gold’s price during the Covid pandemic: first the metal saw a surge in demand as investors rushed to protect themselves in case of recession, before an easing off as vaccines were rolled out and economies began to reopen. Many investors looked to increase exposure to the metal again as inflation rises, but demand has again tailed off as the US Federal Reserve signalled it could raise interest rates earlier than expected. 

Market trends

The Royal Mint says there are three key market developments to watch: changing monetary policy due to inflation risk, low interest rates and government debt; central banks actions such as crisis performance and de-dollarisation; and how much pent-up demand there is for jewellery.

So how are fund managers dealing with the current price fluctuations? Steve Land, lead portfolio manager of the Franklin Gold & Precious Metals Fund, says the path to a full global recovery is unlikely to be smooth: “Despite notable improvement in the US, China and elsewhere, the global economy is still under extreme stress after a year of pandemic-induced lockdowns.”

He believes inflation will be important for many countries as they look to deflate their way out of the debt accumulated from the crisis—debt which due to inflation, will be worth less over time. And as a result, regional demand for gold could be driven up.

Of course there is speculation that Bitcoin and other cryptocurrencies might be the new gold, replacing the yellow metal in some investors’ minds as an inflation hedge. Land says: “However, we see significant differences in the way many governments view and treat cryptocurrencies compared to gold, and we certainly see government regulations as a major risk factor that does not exist to the same degree for gold given the long history and central banks’ heavy involvement in the gold market.”

Paul O’Connor, head of multi-asset at Janus Henderson, is more sceptical, noting that even gold has a history of not living up to its reputation as an inflation hedge. For example, from last summer and into the spring, it traded lower despite a reflationary market environment.

“We expect real yields to head higher in the months ahead as investors focus on central banks’ QE exit strategies. Rising real bond yields will present significant headwinds for gold,” he says. 

Investment opportunities

So are there still opportunities in the gold and precious metals space? Land thinks more consolidation, with mergers and acquisitions already happening in 2021, could be reason for optimism. Small- and mid-cap gold equities may present some of the best M&A opportunities, he says, as mining companies seek more resources following years of limited exploration and development.

“Although the pullback in gold from the 2020 highs is noteworthy, the opportunities in gold- and precious-metals-focused equities are compelling, especially if gold prices can hold current levels or move even higher," says Land.  The fund’s top five holdings are Barrick Gold, Endeavour Mining, Newmont, Newcrest Mining and Perseus Mining—with Canada accounting for over half of its regional allocation.

Louise Fribourg, tactical asset allocation analyst at Fidelity Solutions & Multi Asset, is currently neutral on the prospects for gold overall, but has been adding to white metals (such as Silver and Platinum) as an inflation hedge, with some exposure to industrial activity.

“Over the coming months, the key for investors will be to understand the nature of current inflationary dynamics," she says. "We believe them to be transitory, but any change to this and evidence of more persistent inflation could mean a re-think of exposure to gold for many investors.”