The price of gold fell about 4% over the course of 2021, which was its biggest decline since 2015.
This is because as global economies opened after the Covid pandemic, investors became more optimistic and moved towards riskier assets. Money has found its way into the equity markets and away from safe-haven assets such as precious metals. Even high inflation failed to help the price of gold. The prospect of higher interest rates steered investors to other assets rather than buy the valuable metal.
As we start 2022, it now seems a good time to take a look again at gold in my own portfolio.
Investing in gold
Thinking about my own holdings, I want to try to reduce my downside risk. Though there are many different options, I like the idea of gold as a hedge against a sudden market downturn.
The price of gold is largely seen as negatively correlated with stock prices. When the market falls investors tend to flock to the asset for safety. This happened in 2020 and though in investing there are no guarantees, if another crash happens it’s likely to be the same again.
There are various options for investing in gold. I can buy physical gold via a broker or the Royal Mint, but I need to consider how to keep it. Storage costs can be expensive.Â
For my own portfolio, I prefer investing in gold through an ETC (exchange-traded commodity). This is a fund that tracks the spot price of gold, but trades like a share and that you can buy and sell through most online brokers.
There are lots of ETCs available with many investment management companies offering one. In choosing one for my own portfolio, I always look at factors such as fund size and management charges. My preference for some time has been iShares Physical Gold ETC (LSE:SGLN). This has been going since 2011, is large in size (over £9bn), and has a low ongoing charge of 0.15%.
Performance and outlook
Of course, the ETC lost money during 2021, reflecting the decline in the price of gold. However, over five years, the ETC is up around 40% and over 10 years, it has risen around 25%.
In the first couple of days of New Year trading, this ETC has remained broadly flat. Despite that, looking ahead to 2022, there’s a lot of global uncertainty that could play into the hands of gold. First, if central banks fail to raise interest rates, assets such as high dividend shares may see capital outflows in favour of gold. Second, geopolitical tensions, especially looking towards Russia and the Taiwan Strait, could see money move towards the precious metal as a safe-haven bet.
Moreover, the key to building any resilient investment portfolio is diversification and gold is still considered by many professional investors as a sensible portfolio component.
I could be wrong, but I still think of iShares Physical Gold ETC as a hedge against stock market uncertainty and continue to be comfortable holding a small allocation of it within my portfolio.