Gold glowed in Brexit’s shadow

After several lackluster years, gold bullion and gold miners have gleamed through the storm clouds.

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On June 23, the U.K. voted to leave the European Union—a move commonly referred to as “Brexit”—and global markets reacted violently. The next day, the S&P Global 1200 plummeted roughly 5%.1

Meanwhile, “safe-haven” assets, like government bonds, the U.S. dollar, and Japanese yen rallied. But gold was a standout, hitting a two-year high amid the biggest two-day surge in seven years, as nervous investors sought out the precious metal. Gold futures gained 5% on June 24, then added another 0.75% on June 271 (see the chart below).

Gold brightens in 2016

It had already been a very good year for investors in the precious metal. Gold bullion gained 17% in the first quarter of 2016, and is up 25% year to date—already the largest yearly gain in more than 30 years.2 Holdings by the largest gold ETF, SPDR Gold Trust (GLD), surged by more than 13 tonnes on June 27, 2016, and have surged by over 78 tonnes since the end of May, a 9.1% increase.3 This implies demand for gold assets has been particularly fever-pitched lately.

Three factors that may have contributed to the gold rush this year include:

  • Supply: Gold mining supply is forecast to decline roughly 11% over the next three years. The last time gold mining supply declined for at least three straight years was 2001–2008 (when supply declined 8% and gold prices increased 229% over that time period).2
  • Demand: The World Gold Council reported that demand for gold touched 1,290 tonnes in the first quarter of 2016, a 21% increase year-over-year and the second-largest quarter ever. While demand this year from India and China, the world’s two largest consumers of gold, has been softer than previous years, signs of an increasing appetite for the metal are beginning to show. For instance, China, the world’s second-largest economy, increased bullion imports from Hong Kong in May.3
  • Interest rates: Negative real interest rates in many countries may have helped spur demand for investments perceived as safe havens, like gold bullion.

In the wake of Brexit, investors took notice; gold futures’ trading volume in New York was 18% above its 10-day average on June 27, 2016.4

Of course, this year’s rally follows four consecutive years of declines in the price of gold. After peaking above $1,900 per troy ounce in 2011, gold threatened to drop below $1,000 last year before rebounding in 2016 (see the chart below).

Tame inflation, increased risk appetite, and a decade-long spike may have contributed to the gold bear market that lasted from 2011 to 2015. Now, with gold appearing to have regained its former luster this year and Brexit still unfolding, a number of analysts believe gold could continue to shine. The median estimated price forecast among gold analysts, according to a Bloomberg survey released on June 27, 2016, was $1,424 per ounce, from its current level near $1,350.

Nuggets of portfolio wisdom

Forecasting gold’s next move can be difficult, given the near-term ambiguity surrounding the implications of Brexit, not to mention the uncertainty as to the timing of the next possible rate hike by the Federal Reserve—although the likelihood of another increase this year has fallen in the wake of Brexit, according to probability implied by Fed funds futures.

Joe Wickwire, manager of the Fidelity® Select Gold Portfolio (FSAGX) and the Fidelity® Global Commodity Stock Fund (FFGCX), thinks that, in addition to the long-term merits of the asset class, there could be more room for gold to rally near-term, now that the Fed may stand pat for longer than previously expected.

“I don't believe the current trajectory of rate increases is likely to compromise gold’s positive story in the near term,” Wickwire notes. “I think part of the reason we’ve rallied this year is that the market realized it had gotten too negative on gold due to the Fed. When you consider the decreased likelihood of rate increases and combine this with increasing demand for gold bullion, I believe the forecast decline in gold mine production over the next three years will be positive for both bullion prices and gold-producing companies.”

Wickwire’s gold fund invests in both bullion and gold-producing companies, and he thinks there may be opportunities in stocks of companies that are well positioned in the current environment. Miners have been on fire in 2016; the NYSE ARCA Gold Miner Index (GDM) is up 94% year-to-date.

“Despite supply coming down over the next three years, the industry appears to be in the early to middle innings of getting right-sized," says Wickwire. "This rebound in gold has probably temporarily interrupted the necessary Darwinistic process that was taking place. Being selective across the opportunity sets of gold stocks and bullion will continue to be critical.”

Beyond supply and demand, the gold industry can be significantly affected by international monetary and political developments such as currency devaluations or revaluations, central bank movements, economic and social conditions within a country, trade imbalances, or trade or currency restrictions between countries. So longer term, Wickwire suggests utilizing a holistic approach to how you might consider incorporating a gold allocation into your portfolio.

“I believe investors should consider thinking about gold as an asset class within the context of a well-diversified, risk-tolerant portfolio," Wickwire explains. "In my view, it can act like a financial asset insurance policy; it has a payoff profile that tends to do well when financial assets like stocks, bonds, and currencies disappoint relative to historic performance or relative to current expectations. But remember: Gold can be an inherently volatile asset class. You should know why you own it, know how much you should own given your investing objectives and risk tolerance, and have a plan that allows you to take advantage of volatility to sustain your desired allocation.”

Fidelity® Select Gold Portfolio Top 10 Holdings5
As of 3/31/2016
RANDGOLD RESOURCES LTD ADR
GOLDCORP INC
NEWMONT MINING CORP
NEWCREST MINING LTD
FRANCO-NEVADA CORP
AGNICO EAGLE MINES LTD
BARRICK GOLD CORP
B2GOLD CORPORATION
ANGLOGOLD ASHANTI LTD SPON ADR
TOREX GOLD RESOURCES INC
% of Total Portfolio = 47.86%
Fidelity® Global Commodity Stock Fund Top 10 Holdings5
As of 3/31/2016
MONSANTO
SYNGENTA AG
CHEVRON CORP
POTASH CORP OF SASKATCHEWAN
RIO TINTO PLC
MOSAIC CO NEW
CF INDUSTRIES HOLDINGS INC
BHP BILLITON PLC
AGRIUM INC
TOTAL SA
% of Total Portfolio = 33.64%

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1. Source: FactSet, as of June 27, 2016.
2. Source: Fidelity Investments, as of June 27, 2016.
3. Source: The Hightower Report, as of June 28, 2016.
4. Source: Bloomberg, as of June 27, 2016.
5. Any holdings, asset allocation, diversification breakdowns or other composition data shown are as of the date indicated and are subject to change at any time. They may not be representative of the fund's current or future investments. The Top Ten holdings do not include money market instruments or futures contracts, if any. Depository receipts are normally combined with the underlying security. Some breakdowns may be intentionally limited to a particular asset class or other subset of the fund's entire portfolio, particularly in multi-asset class funds where the attributes of the equity and fixed income portions are different.
Views expressed are as of the date indicated, based on the information available at that time, and may change based on market or other conditions. Unless otherwise noted, the opinions provided are those of the authors and not necessarily those of Fidelity Investments or its affiliates. Fidelity does not assume any duty to update any of the information. References to specific investment themes are for illustrative purposes only and should not be construed as recommendations or investment advice. Investment decisions should be based on an individual’s own goals, time horizon, and tolerance for risk. This piece may contain assumptions that are “forward-looking statements,” which are based on certain assumptions of future events. Actual events are difficult to predict and may differ from those assumed. There can be no assurance that forward-looking statements will materialize or that actual returns or results will not be materially different from those described here.
The gold industry can be significantly affected by international monetary and political developments such as currency devaluations or revaluations, central bank movements, economic and social conditions within a country, trade imbalances, or trade or currency restrictions between countries.
Changes in the political or economic climate, especially in gold-producing countries such as South Africa and the former Soviet Union, may have a direct impact on the price of gold worldwide.
The S&P Global 1200 Index is a free-float weighted stock market index of global equities from Standard & Poor's. The index covers 31 countries and approximately 70 percent of global stock market capitalization.
The NYSE Arca Gold Miners Index provides exposure to publicly traded companies worldwide involved primarily in the mining for gold, representing a diversified blend of small-, mid- and large-capitalization stocks.
The precious metals market is extremely volatile, and investing directly in physical precious metals may not be appropriate for most investors.

Past performance is no guarantee of future results.

Keep in mind that investing involves risk. The value of your investment will fluctuate over time, and you may gain or lose money.

All indexes are unmanaged. You cannot invest directly in an index.
Stock markets are volatile and can decline significantly in response to adverse issuer, political, regulatory, market, or economic developments.
Because of its narrow focus, sector investing tends to be more volatile than investments that diversify across many sectors and companies. Sector investing is also subject to the additional risks associated with each particular industry.
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