Will gold continue to shine?

The gold price has risen 12% over 4 months, making the precious metal one of the best performing asset classes so far this year. Perhaps more interestingly, the correlation between gold and equities has turned positive for the first time since mid 2019, calling into question its diversification benefit in multi asset portfolios. However, we still like gold as a hedge against potential currency debasement in a world of expanding fiscal deficits and money supply.

There is typically an inverse relationship between gold and equities, as gold is viewed as a safe-haven asset when equity markets fall. However, our chart of the week shows that correlation of the two asset’s returns has turned positive since the March selloff. The gold price fell in mid March together with the equity market, as liquidity in the financial system dried up and investors rushed for cash. In April, the gold price rallied together with equities as global central banks injected significant liquidity and pledged a ”whatever it takes” approach to maintaining healthy funding conditions across the economy.

Gold and equities are usually positively correlated in market regimes driven by liquidity and changing real yields, which reflects the current environment to some extent. A positive correlation also means that the diversification benefit of holding gold might be lower. Having said that, we still hold a positive view on gold over the medium term as it can hedge against the potential risk of currency debasement given the significant scale of fiscal and monetary stimulus. It is also worth noting that returns from  gold producers lagged those of physical gold in March, but recorded a sharp catch-up in April. This means they have now delivered a similar return as physical gold year-to-date. We stay invested in gold and gold producers in many of our multi asset portfolios.

 

Correlation of equity versus gold and gold producers - Rolling 60-day correlation

 

Source: Fidelity International, Refinitive DataStream. 30 April 2020. Equity market is proxied with MSCI ACWI index. Gold is represented by gold bulion price. Gold producer is proxied with S&P Commodity Producers Gold index.

 

This document is issued by FIL Responsible Entity (Australia) Limited ABN 33 148 059 009, AFSL No. 409340 (“Fidelity Australia”).  Fidelity Australia is a member of the FIL Limited group of companies commonly known as Fidelity International.

Investments in overseas markets can be affected by currency exchange and this may affect the value of your investment. Investments in small and emerging markets can be more volatile than investments in developed markets.

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