Gold: a wise investment in 2021?

It’s hard to make the case for frankincense and myrrh in 2020. 

Gold, on the other hand, has grabbed investors’ attention all by itself.

Having been some way off its 2011 peak since a brief period in 2013, this summer gave the precious metal the boost it needed to scale new heights and cross $2,000/oz.

The reason for the record breaking rise this time round was the prospect of much lower growth in the US, on the back of virus-induced hits to business, and the resultant weakness in the dollar.

As the yellow metal is priced in dollars, the currency going lower is good news for the gold price. It brings down the cost to buyers around the world who need less of their foreign notes to buy the same weight of bullion.

‍

Will government spending spark inflation?

The domino effect went further, with lower interest rates and bond yields coming too. This situation supported the gold price, as fans saw even less reason to give up gold and go for income-generating assets like bonds.

Gold doesn’t offer an income but when bonds don’t really either, suddenly the metal starts to look more interesting.

Throw in talk of negative yields and gold’s absent income looks downright generous.

And then there’s the threat of inflation. 

While we did have big interest rate cuts and central banks pumping out cash into the economy after the financial crisis in 2008, which didn’t trigger higher inflation, the picture looks a bit different in 2020. 

Back then, central banks focused on bond buying, which helped banks repair their balance sheets but didn’t really filter out any further.  

This time, that money has been put to work directly in the real economy. 

The cause of the tumult this year is miles away from the causes 12 years ago as well.

So, with banks stronger now, governments haven’t felt the need to prop them up, and have directed cash and tax breaks straight to companies and workers.

That difference, as well as the sheer scale of government spending in the US, UK and Europe this year might suggest that higher inflation could be on the cards in 2021.

In gold we trust?

We’ve seen investors plough into the metal this year for exactly that reason. 

And if we get the ‘higher inflation, negative yields and lower growth’ situation that the broader market would really rather avoid, they might just hang onto it. 

In terms of our own investment portfolios, gold has the capacity to serve as a diversifier, especially if inflation starts to take the shine off the prospects for shares and bonds. 

“It’s tough to make predictions, especially about the future” - Yogi Berra

It would require bravery bordering on stupidity to say with confidence what’s going to happen in any sense, going into 2021.

And that’s also part of the reason investors tend to hold gold - the unknown.

Diversification is about affording our assets the comfort to know that, if they fall behind, they can pass the baton to a team-mate. 

If you’re looking to add a bit of a shine to your holdings, you don’t have to go panhandling or safe-shopping. 

Exchange-traded instruments like the iShares Physical Gold ETC might be useful for anyone looking for exposure to the gold price. 

Options like the L&G Gold Mining ETF track the performance of a range of global gold mining stocks.

And then there are the stocks themselves.

Gold mining companies usually have high fixed costs. When the gold price rises that means all revenues over and above these costs turn into profit.

Among the many options on Freetrade are Egypt-focused Centamin, Toronto-based Barrick, and the UK’s Greatland Gold.

‍

Take control of your investments by joining our commission-free trading platform. Stop letting share dealing fees and charges eat into your investments when you invest in stocks, ETFs or investment trusts.

‍

Important information 

This should not be read as personal investment advice and individual investors should make their own decisions or seek independent advice. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication.

When you invest, your capital is at risk. The value of your portfolio can go down as well as up and you may get back less than you invest. Past performance is not a reliable indicator of future results.

Freetrade is a trading name of Freetrade Limited, which is a member firm of the London Stock Exchange and is authorised and regulated by the Financial Conduct Authority. Registered in England and Wales (no. 09797821).