US Edition
The investment adage, “cut your losses short and let your profits run”, should not be followed implicitly.
Certainly, struggling companies that are very unlikely to experience share price recoveries should be sold. And high-quality stocks that remain undervalued despite generating large share price gains can produce even greater returns over the long run.
However, in Questor’s view, decisions regarding whether a specific position should be held or sold are best made irrespective of their past gains or losses.
This column’s holding in gold, for example, has generated a 22pc gain since it was added to our Wealth Preserver portfolio in April 2021.
Since then, gold has proved popular among investors as the global economy’s outlook has become increasingly uncertain amid high inflation and rising interest rates.
However, the case for buying gold, and even continuing to hold it, is becoming increasingly difficult to make.
Although US inflation has fallen at a brisk pace over recent months so that it now stands just one percentage point above the Federal Reserve’s 2pc target, hawkish comments from policymakers suggest further interest rate rises are likely to be implemented.
Indeed, if inflation proves to be sticky, it would be wholly unsurprising for monetary policy tightening to continue.
Rising interest rates are likely to weigh on gold’s price. They would make interest-producing assets such as bonds more attractive on a relative basis, thereby reducing demand for the precious metal.
Of course, it is extremely difficult, if not impossible, for the Federal Reserve to perfectly time the pace and scale of interest rate rises. They may, for example, overshoot monetary policy tightening and cause a period of below-target inflation that prompts widespread calls for interest rate cuts.
In this scenario, gold prices would be likely to benefit as the precious metal becomes more attractive relative to income-producing assets.
However, it would be unlikely to profit to the same extent as riskier assets, notably equities and commodities, that could become increasingly in-demand as a more accommodative monetary policy positively impacts the global economy’s growth rate.
Therefore, holding equities rather than gold is likely to produce higher returns as the current cycle of interest rate rises ends and a new era of dovish monetary policy commences.
Owing to gold’s lack of relative appeal amid rising interest rates, as well as in a scenario where monetary policy becomes more accommodative, Questor would normally advise readers to sell it.
However, it will remain a holding in our Wealth Preserver portfolio, for the time being at least, for one very good reason. It offers an insurance policy, of sorts, against global economic woes.
Although the Federal Reserve’s rapid interest rate rises have not yet caused a severe global economic slowdown, it is too soon to be sure.
After all, the full impact of interest rate rises on economic growth, unemployment rates and various other economic data will not be known until many months have passed because of time lags.
And while various economists now think the world economy’s growth rate will accelerate over the coming months, their forecasts are notoriously unreliable and highly changeable.
Therefore, while this column does not expect gold to offer any significant further capital gain, its defensive characteristics provide a degree of ballast amid a highly uncertain period.
By contrast, the equities and commodities holdings in our Wealth Preserver portfolio offer excellent long-term growth potential.
Although they have thus far posted a capital loss of 24pc and a modest capital gain of 9pc, respectively, in what has been a turbulent period for risk assets, their relatively attractive prices amid downbeat investor sentiment suggest improving returns are ahead.
Their gains may not necessarily be delivered in the immediate future, depending on the ultimate effect of interest rate rises on the world economy.
But an evolving monetary policy that positively affects the global economy’s growth rate means they have far greater scope for capital growth than gold over the coming years.
As a result, when gold is removed from our Wealth Preserver portfolio in the near future, the proceeds are almost certain to be reinvested in high-quality stocks trading at attractive prices. As things stand, we will be spoilt for choice.
Questor says: Hold
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