Gold funds return to form as inflation concerns mount

Over the years, gold has proved its value in protecting portfolios from volatile markets and inflation. 

The risk of a sustained period of higher inflation has sent the gold price higher and in May led to strong performance for both active and passive strategies that invest in the precious metal.

Seven of the top 10 funds invest in gold, with Baker Steel Gold & Precious Metals the top performer, up 11.7%. In second place was Ninety One Global Gold, which returned 11%.

Ben Yearsley, of Shore Financial Planning, who compiled the figures, notes: "Gold was clearly the big winner in May. The strong rise in the gold price clearly helped drive this as well as the strong fundamentals of a gold sector awash with cash.”

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Over the past two months, the gold price has risen around 10%, reaching a four-month high of just below $1,900 in late May. Increasing concerns over potentially higher inflation has been a key driver behind the gold price picking up.   

In theory, rising levels of inflation should bode well for gold. The precious metal has historically provided a hedge against inflation. This is because governments and central banks cannot simply print more gold, as they can currencies. As a result, its value is preserved.

Investor interest in gold picked up in May among interactive investor customers, with the iShares Physical Gold ETC and WisdomTree Physical Gold ETF entering the top 10 table of most-purchased exchange-traded funds (ETFs). 

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Best-performing funds in May 

Data from 30 April 2021 to 30 May 2021. Source: FE Analytics.

Pros and cons of investing in gold  

As part of a diversified portfolio, defensive assets that are genuinely uncorrelated to the fortunes of equity markets play a key role in protecting investor capital when markets fall suddenly. Over the years, gold has proved its value when it comes to protecting portfolios from volatile markets.

Against those benefits, though, gold does not have a yield, nor does it generate cash flow or profit. Instead, its price simply reflects what the next person is prepared to pay for it, so it tends to be volatile. 

Due to previous metal and gold funds giving investors a rocky ride it is prudent for investors to limit their exposure, restricting it to a small percentage of a diversified portfolio. Gold funds mainly invest in gold mining companies, which tend to rise and fall more than the gold price. 

Therefore, gold funds can leave investors nursing heavy paper losses – depending on when they bought. Those who bought Baker Steel Gold & Precious Metals a decade ago, for example, would be down 75.8%. Other gold funds have performed better over the period with Ninety One Global Gold up 9%.

Those who time their entry well, for example buying in 2020, a year in which the top-performing gold fund MFM Junior Gold returned over 60%, should consider rebalancing and taking some profits. Not doing so risks leaving your portfolio overly exposed to the precious metal. On a 10-year view, MFM Junior Gold is down 62.6%.