Now that the Bank of England has started talking about the real possibility of sharp inflation this year and next, the question arises how investors should protect themselves against rising prices.
The case for gold
Gold has long been considered a hedge against inflation. Simply put, inflation decreases the purchasing power of a currency, so you need more currency to buy the same amount of gold.
However, it is by no means perfect.
If central banks raise interest rates in response to inflation, an asset without any earnings such as gold may not be as good as investments that pay earnings, such as high dividend shares.
That said, the key to building any resilient investment portfolio is diversification and gold is still considered by many professional investors as a sensible portfolio component. Generally, when equity markets see a negative shock, like they did in March 2020, physical assets like gold tend to rise. Looking at 2020 as a whole, the FTSE 100 fell more than 14% in the year, whilst gold had one of its best years in a decade.
Options for investing in gold
If you are considering investing in gold, then you could physically buy it via gold brokers or the Royal Mint, but it can seem a bit of a hassle and then there is the question about storage. You might not want to keep quantities of physical gold at home and if you want to store it elsewhere there will be storage charges.
In my opinion, one of the easiest ways is through a gold ETC (exchange traded commodity). These are funds that track the spot price of gold, but trade like a share and that you can buy and sell through most online brokers.
One such gold ETC is iShares Physical Gold ETC (LSE:SGLN). This tracks the gold spot price. It has been going since 2011, is large in size (over £9bn) and has a low ongoing charge of 0.15%. From January to December 2020, it was up around 19%.
Still worth digging into despite recent performance
It is true that the performance this year has not been so good. iShares Physical Gold ETC is down around 6% whilst most stock market indices like the FTSE 100 have risen. This has been compounded by some gut-wrenching days of volatility in the gold price.
However, for me, nothing has changed.
Yes, over the last five years there have been peaks and troughs, but iShares Physical Gold ETC is still up over 20% since 2016. Also, though international stock markets have rallied hard over the last 18 months or so, it is not a given that this kind of performance will continue. Adding that in with the fact that inflation is already here and prices are set to rise further, I am still confident in allocating a little of my portfolio to iShares Physical Gold ETC as both a long-term inflation hedge and to add some diversification.
