A close up of a magnifying glass rests on top of a bar graph that shows declining sales or performance over a quarterly basis. The image is photographed using a very shallow depth of field.

Gold is currently sitting pretty at just over US$1,700 an ounce, up considerably from the sub-US$1,450 level it traded at at the height of the coronavirus panic towards the end of March.

According to the latest analysis from Fidelity International, that makes gold one of the year’s best performing asset classes so far, albeit that the wider markets have made up a lot of the ground lost too during that same crucial period in March.

This parallel strength represents something of a curiosity, since gold is often thought of as a go-to safe haven when markets are falling. To see equities and gold rising at the same time seems counterintuitive, albeit that we are living in unprecedented times anyway.

Fidelity’s client solutions investment director Joseph Zhang notes that the correlation between gold and equities is as close as its been for 18 months.

The question that Fidelity therefore poses is: has investing in gold “lost its lustre” as an effective way to diversify a portfolio?

Zhang points out that gold fell in line with equities before hitting those March lows, before both bounced again.

“When gold and equities become positively correlated, it usually signals a market regime driven by liquidity and changing real yields, such as the current environment,” says Zhang.

“We also saw this positive correlation amid the aftermath of the 2008 financial crisis, the height of the euro debt crisis in 2011-12, and during a period of rising real yields in 2018. A positive correlation with stocks could also mean lower diversification benefits from holding gold in a multi-asset portfolio.”

But it’s not all one way traffic.

“Having said that, we still hold a positive view on gold over the medium term as it can hedge against the potential risk of currency debasement given the significant scale of fiscal and monetary stimulus,” Zhang continued.

“It is also worth noting that returns from gold producers lagged those of the actual metal in March, but recorded a sharp catch-up in April and have now delivered a similar return as the gold price year-to-date. Despite the weakened diversification benefit, gold hasn’t lost all its lustre.”