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.

AFTER seeing record inflows in 2020, the gold price languished last year1. As world stock markets staged strong recoveries and investors looked ahead to rises in US interest rates in 2022, gold lost some of its appeal. Higher US interest rates tend to lead to a stronger dollar and result in fewer dollars being needed to buy an ounce of gold.

Cryptocurrencies also presented a severe challenge to the gold price last year. Those investors minded to diversify into assets protected from the effective devaluation of paper currencies by central banks through money printing have never had so many options to choose from.

However, as we start a new year, there are several reasons to believe the recent lacklustre performance of gold could be turned on its head. First, inflation is proving stickier and stronger than many thought it would be. America’s Consumer Prices Index hit 7% last month2.

Last time inflation reached this sort of level – 40 years ago – gold was flying. Inflation means a reduction in the buying power of paper currencies, including how much gold can be bought for a given amount of paper.

Second, the US economy – which is two-thirds driven by consumer spending – may slow this year. The rising costs of essential goods and services are now heaping pressure on household finances, leaving consumers with less left over to spend each month.

For the dollar, much of the “good news” about America’s growth recovery and higher interest rates could now be in the price. If that’s the case, dollar movements in 2022 could revert to becoming more of a tailwind for gold.

Third, cryptocurrencies have fallen well short of being viable methods of payment. Fleeting money flows mean they have been behaving more like highly volatile risk assets, increasingly correlated with US technology shares. Bitcoin is currently trading around US$42,000 compared with a record high of US$69,000 just two months ago3.

Gold also has the proven ability to perform when the world throws us a curveball and tends to do well when other assets are performing badly.

Events that could derail shares and bonds this year include: interest rate rises pulling the rug from under debt-ridden parts of the economy or fragile emerging markets, for example, Turkey; or a surge in geopolitical risks, for example, starting in Ukraine, the South China Sea or Iran.

If any of these risks or other, unforeseen shocks come to the fore in 2022, gold could well go on to do what it has done in the past and provide a useful decoupling from falling asset prices elsewhere.

The Ninety One Global Gold Fund – formerly the Investec Global Gold Fund – features on Fidelity’s Select 50 list of favourite funds. It’s also one of Tom Stevenson’s four Fund Picks for 2022. This fund invests in a diverse portfolio of gold mining companies worldwide. It also has the flexibility to buy physical gold ETFs and shares in companies that mine for other precious metals, and currently has a 4.3% exposure to silver4.

Watch Tom’s view on the outlook for commodities in Q1.

1, 07.01.22
2 US Bureau of Labor Statistics, 12.01.22
3 Coinbase, 18.01.22
4 Ninety One, 31.12.21

Important information: Investors should note that the views expressed may no longer be current and may have already been acted upon. The Ninety One Global Gold Fund invests in overseas markets so the value of investments can be affected by changes in currency exchange rates. The fund invests in a relatively small number of companies so may carry more risk than funds that are more diversified. The fund also uses financial derivative instruments for investment purposes, which may expose the fund to a higher degree of risk and can cause investments to experience larger than average price fluctuations. The fund has or is likely to have, high volatility owing to its portfolio composition or the portfolio management techniques. Select 50 is not a personal recommendation to buy or sell a fund. 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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