Considering gold amid inflation?

Steve Calhoun makes the case for gold and gold stocks if inflation continues and rates stay low.

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Gold stocks struggled in early 2021 due to a sharp uptick in longer-term interest rates in February and a strengthening U.S. dollar, yet Fidelity’s Steve Calhoun believes rates could remain low and the dollar could weaken longer term, potentially boosting gold stocks in the coming years.

“Inflation picking up is negative for the dollar and positive for gold companies,” says Calhoun, portfolio manager of Fidelity® Select Gold Portfolio (FSAGX). To support his view, he points to higher prices in the first half of 2021 for lumber, real estate, gasoline, crude oil, iron ore, and other commodities.

He adds that he sees companies in the industry with leverage to higher gold prices and the ability to raise output, which he thinks makes for a good stockpicking environment.

Calhoun believes one of the biggest caveats for investors who are bullish on gold is this: If the U.S. Federal Reserve were to raise policy rates, the price of gold and gold stocks likely would suffer.

That said, he thinks few in Congress have the stomach for higher rates, which he says could derail the recovering job market. He adds that the Fed has pledged to hold rates near zero until the economy recovers, even if inflation rises above its 2% target.

Reduced government spending also could hamper the price of gold, Calhoun says. Yet he notes that the Congressional Budget Office projects a massive $16.6 trillion deficit through 2031.

“Neither political party has an appetite for cutting spending any time in the near future, at least as far as I can see,” he says.

For this reason, Calhoun remains focused on gold miners that are achieving healthy earnings and free cash flow, mainly in Australia, the U.S., and Canada.

Notable fund holdings at the end of May included Canadian miners Orla Mining (ORLA) and Agnico Eagle Mines (AEM), each of which he believes has potential to boost production.

The fund also held Franco-Nevada (FNV) and Wheaton Precious Metals (WPM). Calhoun finds the business model of these companies appealing because, unlike mining firms, they do not have the overhang of capital expenses. Instead, each collects royalties on gold and silver.

“I see positive underlying industry trends as of midyear, and I’ve selectively added to several of the fund’s positions,” he says.

Fidelity® Select Gold Portfolio held securities mentioned in this article as of its most recent holdings disclosure. For specific fund information, including holdings, please click on the fund trading symbol above.

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