Gold became the best performing asset class in the 1970s, cultivating a belief that gold acts as a good inflation hedge, but its performance since has proved volatile, says Quilter Cheviot.
Despite inflation rising in the mid-1980s and 90s, the price of gold failed to gather momentum. On the contrary, gold started to rise in a deflationary period precipitated by the financial downturn of 2007/08.
David Henry, investment manager at Quilter Cheviot, said: “This one is a bit of a head scratcher on the surface. A lot of the theoretical bull arguments for gold have materialized this year and the asset has gone nowhere.
“What about recessions? Gold is an asset that people typically buy when they are fearful. Given that recessionary storm clouds seem to be gathering, should we expect this to be a catalyst? Sadly, again, it is not that straightforward. Gold price performance during every recession since 1970 has been positive but hardly a home run.”
Henry said that the price of gold is largely driven by supply and demand, the latter of which can be more difficult to judge.
“Demand is driven by a confluence of factors, some of which can provide conflicting forces and getting a handle on which one is dominant at any given time is largely impossible,” he said.
According to Henry, most investors choose to hold gold within a portfolio because it “dances to its own beat.” The asset has historically moved in different directions to other traditional portfolio investments, and often without a leading reason. As such, it can help risk-conscious investors diversify their wealth.
Henry added: “As a final thought on gold, I have observed over the years that more than any other asset, with the exception of cryptocurrency, it polarises opinion. Few people seem to be “on the fence”, with evangelists on both sides. Not a helpful environment for nuanced debate. In my view, and as a general rule of thumb, it pays to keep an open mind and to cast your investment net as wide as possible. Never is a big five letter word.”
Categories: Investment Committee
