Investors flee to gold as fear grips stock market

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DIY investors have rushed to add gold as high inflation, rising interest rates and geopolitical tensions in Ukraine trigger stock market jitters.

Savers have banked on the yellow metal providing shelter from market and economic volatility. The iShares Physical Gold ETC has been the eighth best-selling fund this year on Interactive Investor, a broker. It was the 10th most bought ETF on AJ Bell this week.

However, the price of gold has been subdued since it surged 21pc in the first year of the pandemic. By the end of 2021 the rally had run out of steam and finished the year down 7pc at $1,806 per ounce.

Ethan Miller*, a 31-year-old lawyer from London, said he was still confident gold could protect his savings from the rising cost of living, adding £2,000 to the metal in the past few months.

“I don’t really have cash savings because interest rates are so low,” he said. “I trust the gold price will rise when there is high inflation.”

However, Duncan MacInnes, who co-manages the Ruffer Investment Company, said he believed the jury was still out on gold’s capacity to act as an inflation hedge.

“It is testing the conviction of its supporters,” he said. “It didn’t really work in the last couple of major market sell-offs and it did not work as an inflation hedge. Bitcoin taking the shine out of gold could be the answer.”

Proponents of the cryptocurrency argue that it can serve as a “digital gold”, because like physical gold it has a scarce supply. But this theory has been undermined in the past three weeks, with the virtual token dropping 21pc to $37,883 in a wider flight away from risky investments.

Mr Miller added that recent drops in Bitcoin had caught his eye. “I looked into buying again. But it is just too volatile for me. I invested £2,000 into cryptocurrencies around a year ago and sold out once I broke even. For me, it’s too much like gambling. Gold is a safer bet.”

Rob Morgan, of the wealth manager Charles Stanley, said that while gold could serve as a helpful wealth preserver, investors should not allocate more than 5pc of their portfolio as it could be a drag on long-term returns. He added that funds that invest in shares, while risky, remained the best way to beat inflation.

“Look for managers that invest in companies with significant pricing power, who can pass on the cost of inflation to their customers,” he said. He pointed to Fundsmith, the £24bn fund run by star manager Terry Smith, which has returned 103pc in the past five years.

“I would also suggest investing in a FTSE 100 tracker, or a fund such as JO Hambro UK Equity Income,” he said. “Both have sizable weighting in sectors that stand to benefit from both rising costs and rising rates, including energy and banks.”