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This blog discusses The Perth Mint's bullion coins and bars, providing information about our latest designs, mintages, sales volumes and sell outs. On a broader front, we share relevant research and opinions for anyone interested in gold and silver bullion investing.

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Gold has delivered strong long-term returns


In the first three months of 2020 the price of gold rose by 4% in USD terms, and almost 20% in AUD terms, strongly outperforming global equity markets, which suffered some of their fastest ever falls. This includes the Australian equity market, which declined by almost 25%, its largest quarterly fall on record.

These market dynamics have stimulated significant interest in gold bullion, with the yellow metal finding favour as a highly liquid, zero credit risk safe haven asset.

Whilst market and investor attention on the gold market often picks up in periods of financial market volatility and/or heightened economic uncertainty, the positive role that gold can play in a portfolio is not limited to such environments, with the yellow metal generating strong returns over the long-term.

From the beginning of this century the price of gold rose from under AUD 450 per ounce to more than AUD 2,150 per ounce at the end of 2019. This amounts to an annual average gain of more than 8.0% across the past 20 years.

Not only has the precious metal performed well in absolute terms during this time, but in relative terms as well. The returns on gold have either matched, or in many cases exceeded, the returns generated by other asset classes.

This is illustrated in the chart and table below, which highlight the returns delivered by gold over multiple periods to the end of 2019, as well as the returns delivered by other asset classes including Australian shares and housing over the same timeframe.

Chart: Asset class returns (%) over multiple time periods to end 2019

With returns of 18.86%, 10.63% and 8.32% per annum over the last 1, 3 and 5 years, gold has almost matched returns delivered by equity markets, and comfortably outperformed defensive assets like cash and bonds over this time period.

Over the past 10 years, gold returned almost 6% per annum, again bested only by share markets, with much of that share market outperformance owing to the recovery of equity markets from the more than 50% declines they suffered during the global financial crisis (GFC).

Over 15 years no equity, property, bond or diversified investment strategy has matched the rise in the gold price, with the yellow metal delivering returns of almost 9.5% per annum over this time period.

Strong returns not limited to the last 20 years.

The strong performance of gold is not contained to the new millennium alone, with the yellow metal, despite its short-term volatility, delivering an annual average price growth of almost 9% since the start of the 1970s. This can be seen in the table below, which plots the end of year gold price in USD per troy ounce.

Gold’s upward trajectory in the long-run is highlighted clearly in the above chart, with the price predominantly driven by investment flows (both physical bar and coin demand as well as ETF buying), jewellery demand and central bank buying. 

Given the current monetary environment investors face, and the ongoing economic and financial market risks, there is little reason to believe the long-term upward trend in gold prices will change soon.

The yellow metal looks set to remain an important asset in well-diversified portfolios.

Disclaimer

Past performance does not guarantee future results.
The information in this article and the links provided are for general information only and should not be taken as constituting professional advice from The Perth Mint. The Perth Mint is not a financial adviser. You should consider seeking independent financial advice to check how the information in this article relates to your unique circumstances. All data, including prices, quotes, valuations and statistics included have been obtained from sources The Perth Mint deems to be reliable, but we do not guarantee their accuracy or completeness. The Perth Mint is not liable for any loss caused, whether due to negligence or otherwise, arising from the use of, or reliance on, the information provided directly or indirectly, by use of this article.






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Market crash drives gold demand

Executive Summary

 •  Despite a slight pullback in March, gold recorded its sixth straight quarterly gain in Q1 2020, up 4% in USD terms, and almost 19% in AUD terms.

 • Silver fell by 15% in USD terms in March, with the gold to silver ratio rising to over 110. 

 •  Equity markets saw significant declines in March, with the ASX 200 seeing its worst ever quarterly fall during Q1 2020, down by more than 24%

 •  Oil suffered its largest quarterly fall on record, declining by more than 60% in Q1 2020.

 •  Gold demand was strong in March, with record inflows into Perth Mint listed products, whilst sales of minted gold bars and coins topped 90,000 troy ounces, the highest monthly figure since April 2013.

Full monthly review - March 2020

March 2020 was one the most volatile months in financial market history, with declines across a range of asset classes. Equity markets like the S&P 500 in the United States saw their fastest ever fall into bear market territory (typically characterised as a decline of more than 20%), with the market dropping by more than 30% from their highs seen in late February 2020.

Australia was not spared, with the local ASX 200 falling by over 20% in March, leading to a calendar quarter decline of almost 25%. The price of oil also dropped by over 50% in March alone, with ‘black gold’ seeing its largest quarterly decline on record.

The growing threat from coronavirus has been the primary cause of the decline in equity markets globally. The extreme measures being taken to slow the spread seem likely to lead to global recession in the coming quarters.

Economic output is likely to fall by a far larger amount in aggregate than it did during the worst of the Global Financial Crisis (GFC), with almost 10 million American’s filing for unemployment in the last two weeks alone.   

The volatility in financial markets and the threat to the economic outlook has led to a range of emergency fiscal and monetary policies being enacted around the globe. In the United States,  the US Federal Reserve made an emergency interest rate cut of 0.50% in early March, and followed this up with a 1% cut on March 16.

The Fed has also launched what is a potentially unlimited quantitative easing (QE) program, with their balance sheet already rising above USD 5.2 trillion. On the fiscal side, the Trump administration is looking at over US 2 Trillion in stimulus spending.

In Australia, the Federal government has announced stimulus plans of over 100 billion dollars. The Reserve Bank of Australia (RBA) cut interest rates from 0.75% to 0.25% in March and implemented their own Quantitative Easing (QE) program.

Given this backdrop, it is unsurprising that defensive assets rose amongst strong demand in Q1 2020. US and Australian 10-year government bonds saw yields fall by 46% and 63% respectively, ending the quarter below 0.80%, whilst the US dollar index also rose by over 3% during the quarter. 

Gold as the ultimate safe haven asset was also well supported in Q1 2020, with investment interest in the yellow metal picking up considerably. Perth Mint gold coin and minted bar sales more than quadrupled between February and March 2020, whilst silver sales tripled.

Additionally, our ASX listed product Perth Mint Gold (ASX: PMGOLD) saw more than 23,000 ounces of inflows in March 2020, almost double the previous record for any calendar month.

Some argue that the gold price should be higher than its current level given the sheer scale of the sell-off in equity markets during Q1 2020, but in many ways the price action is similar to the Global Financial Crisis (GFC).

Back then, gold actually sold off for a short period of time, as investors rushed to liquidate whatever they could, before rocketing higher as monetary stimulus saw investors turn toward the precious metal.

This can be seen in the chart below, which plots the price of gold (gold line) and the index level of the S&P 500 (red line) from 2007 to 2009.

The chart highlights the fall in the USD gold price from mid-March to November 2008, with the yellow metal falling almost 30%, whilst equities fell by almost 50% over this time period.

Gold recovered back above USD 1,000 per troy ounce by the end of 2009, and continued to climb strongly in 2010 and 2011, with the price almost tripling in a three-year period from the late 2008 low.

The key driver of that gold price rally was the monetary policy decisions taken by the US Federal Reserve, who over 10 years ago slashed interest rates to zero, and began QE programmes much like they are today.

Outlook

Short term there are a number of factors which could push the price of gold in either direction, some of which are listed below.

Potential headwinds

 • Gold and the USD have risen together for most of the last 18 months, but continued US dollar strength could hold gold back, especially if we see a sharp spike higher in the greenback.

 • Low and rapidly declining inflation expectations may subdue gold prices, though gold has rallied strongly in prior periods of low inflation.

 • Russia halting official purchases of gold takes out a large buyer, though net central bank demand is likely to remain positive in 2020.

 • Sell off in silver and gold stocks: Strong precious metal bull markets often see silver and gold stocks outperform gold to the upside. This has not happened this time, with the gold to silver ratio ending Q1 2020 above 110, a huge increase from end 2019 when the ratio was just 85. Gold stocks (as proxied by GDX) were also down, falling by over 20% for the quarter. 

Potential tailwinds

 • Gold is strongly outperforming equities, with the S&P 500 to Gold ratio dropping from 2.13 at end December 2019 to 1.77 by end March 2020. This should help attract additional inflows from investors. 

 • Emergency fiscal stimulus and monetary policy easing are likely to support gold, with the balance sheet of the US Federal Reserve already exceeding USD 5 trillion. Unlike prior iterations of quantitative easing, there appears to be no upper limit to the current programme.

 • The majority of global sovereign debt now trades at negative real yields, making gold a high yield (and zero credit risk) investment in comparison.

 • Continued uncertainty regarding the impact of coronavirus on economic growth should also help support gold, even if a global recession is now the ‘base case’ for most investors.

Managed money speculators have also cut their gross long positions by more than 40% since mid-February 2020, meaning substantial froth has come out of the market in the past six weeks. The importance of this sector of the market can be seen in the chart below, which plots managed money gross long and gross short positions from late 2017 to today.

The chart highlights the large build up in managed money long positions, and the complete unwind of managed money short positions between September 2018 and February 2020, with this activity playing a key role in the gold rally over this time period.

The other factor which will impact gold in the coming quarters is the performance of equity markets. Coming off one of the worst quarters on record, one would not be surprised to see a rally, especially given the sheer scale of monetary and fiscal stimulus being deployed across the G20. Indeed, some equity markets already rallied almost 20% in late March.

Against this, investors need to bear in mind that whilst equity markets are cheaper, they are hardly cheap. It seems like a lifetime, rather than a month ago that we wrote this article  warning about historically high price to earnings and price to sales ratios.

The crash in the equity market has driven these ratios down, but one suspects the denominator for both ratios (earnings and sales) has a long way to fall in the coming quarters, with some earnings predicting double digit declines. Many listed companies are also openly stating that they’ll no longer engage in buybacks, a process which has provided a huge boost to earnings ‘growth’ over the last decade.

There is also the question of whether or not we will see a V, a U or an L shaped economic recovery once the threat of coronavirus has been sufficiently contained. Given no one can determine when a proper recovery can even begin, nor how much monetary and fiscal largesse will be required to keep economies on life support, the jury is still well and truly out in this regard.

Given these factors, we remain constructive on the outlook for gold, and the role it can play in well diversified investment portfolios.

Disclaimer:

Past performance does not guarantee future results.

The information in this article and the links provided are for general information only and should not be taken as constituting professional advice from The Perth Mint. The Perth Mint is not a financial adviser. You should consider seeking independent financial advice to check how the information in this article relates to your unique circumstances. All data, including prices, quotes, valuations and statistics included have been obtained from sources The Perth Mint deems to be reliable, but we do not guarantee their accuracy or completeness. The Perth Mint is not liable for any loss caused, whether due to negligence or otherwise, arising from the use of, or reliance on, the information provided directly or indirectly, by use of this article.



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Monthly holdings report - PMGOLD soars in March 2020

Topics [ Perth Mint Gold ]

Perth Mint Gold (ASX: PMGOLD) holdings soared in March 2020, hitting a new all-time high of 174,475 ounces (5.43 tonnes), with inflows of almost 25,000 ounces for the month.

Monthly flows into PMGOLD can be seen in the chart below, with March 2020 seeing the fastest pace of inflows on record, almost doubling the prior record set back in August 2019.


Source: The Perth Mint, ASX, Reuters

Inflows in March continue a strong run for PMGOLD that dates back to September 2018, with total holdings more than doubling over this time period.

The value of PMGOLD holdings also topped AUD 440 million for the first time in March 2020, driven by the record inflows, as well as the 2.95% rise in the Australian dollar gold price, which ended the month trading above AUD 2,500 per troy ounce.

To learn more about investing in PMGOLD, simply download our PMGOLD Factsheet.



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Monthly Sales - March 2020

Topics [ Monthly Sales ]

Total ounces of gold and silver sold by The Perth Mint in March 2020 as coins and minted bars:

  - Gold (Au): 93,775 oz

  - Silver (Ag): 1,736,409 oz

NB This chart shows total monthly ounces of gold and silver shipped as minted products by The Perth Mint to wholesale and retail customers worldwide. It excludes sales of cast bars and other Group activities including sales of allocated/unallocated precious metal for storage by the Depository.



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Why you should carefully watch this one ratio as market volatility escalates

The S&P 500 to Gold ratio measures how many troy ounces of gold you could purchase with one 'share' of the S&P 500. If gold was trading at USD 1,000 per troy ounce, and the S&P 500 price index was at 1,000 points, then the ratio would be 1. 

The reason this ratio is popular and worth monitoring is because it can easily gauge the ‘mood’ of the investment community. A low ratio indicates investors are feeling pessimistic about the outlook for the economy and financial markets, whilst a high ratio suggests investors are optimistic. Many believe a low ratio indicates that gold is expensive relative to equities, whilst a high ratio indicates that equities are expensive relative to gold. 

The chart below plots the movements in the S&P 500 to Gold ratio from the beginning of the 1970s through to the end of last month, with the ratio sitting at 1.86 at the end of February 2020. 

Source: The Perth Mint, Reuters

The chart highlights that there have been four distinct multi-year trends in the Gold to S&P 500 ratio over the last 50 years.

• A decline in the ratio throughout the 1970s, as stagflation saw equity markets disappoint and gold prices soar. The ratio fell from over 2.25 to below 0.2 between 1971 and February 1980.

• An increase in the ratio throughout the 1980s and 1990s, as equities embarked on one of their greatest ever bull-market runs and gold prices languished in a two-decade bear market. As the chart highlights, the ratio peaked at almost 5.5 in August of 2000. 

• A decrease in the ratio from August 2000 through to August 2011, driven by a multi-year bull market in gold which saw the price rise from below USD 300 to above USD 1,800 an ounce. Equities were battered by the NASDAQ crash, the September 11, 2001 terrorist attacks and the Global Financial Crisis, which contributed to the ratio dropping from 5.47 to just 0.67 during this period.

• An increase in the ratio from 0.67 in late 2011 to 2.45 by September 2018. This was driven by a rally in the S&P 500 where it rose from 1,219 to 2,913 points and gold prices (in US dollars) fell by 35% over this time period. 

The table below plots the price of gold, the price level of the S&P 500, and the S&P 500 to Gold ratio at each of the inflection points mentioned above. It also details the reading as at the end of Friday 13 March 2020, when data for this article was collated.

Source: The Perth Mint, Reuters

The ratio has begun to turn down again

The table above highlights the fact that the S&P 500 to Gold ratio has begun to move lower over the past 18 months, falling from 2.45 at the end of September 18 to 1.77 on Friday 13 March 2020. 

This highlights the fact that gold has outperformed the S&P 500 recently, with the USD price of gold up by 28.31%, whilst the S&P 500 has declined by 6.97% over this time period.

This is important as a declining ratio will likely encourage further investment into gold going forward, particularly when the fall in the ratio is being driven by  heightened volatility in equity markets. 

In periods where gold and equities rise together (like they did for most of 2019), there is minimal to no opportunity cost if a portfolio manager or personal investor doesn’t own gold, as their stock portfolio is growing. 

Gold going up alongside the equity market is a curiosity to many investors. Gold going up whilst equities are tanking and fear abounds is an entirely different phenomenon. One that typically leads to an increase in all types of investors wanting to own the precious metal. 

What happens next?

From 1971 through to the end of February 2020, the S&P 500 to Gold ratio has averaged 1.54, roughly 13% below the 13 March 2020 reading of 1.77. By this metric, gold is somewhat cheap relative to equities, though nowhere near as cheap as it was on a relative basis back in August 2000, when the ratio was above 5. Gold is also not as expensive as it was on a relative basis in February 1980, when the ratio bottomed out at 0.18.

Whilst no one can state definitively which way this ratio will move going forward, there is a good chance it will continue to decline, with gold continuing its recent outperformance relative to equity markets.

Even if the impact of Coronavirus is less severe than currently anticipated it remains a fact by many metrics, including price to sales and cyclically adjusted price earnings ratios, that equity markets even after their recent correction are still expensive by historical standards.

To that end, whilst the recent pain we have seen in equity markets has been swift, it has not yet been brutal, at least not relative to prior periods where equities were trading at such lofty multiples, with historical drawdowns of over 50% not uncommon. 

The policy response that we have seen from central banks since late February, coupled with already low to negative real interest rates and government bond yields, will of course provide some support for equity markets going forward, but history would suggest it will also benefit gold. 

Indeed research from The Perth Mint looking at investment returns from 1971 to 2019 found that gold delivered average annual increases of just over 20% in years where real interest rates were 2% or less, like they are today. 

Given all of these factors, the strategic case for including gold in an investment portfolio today remains compelling.

Disclaimer

Past performance does not guarantee future results.
The information in this article and the links provided are for general information only and should not be taken as constituting professional advice from The Perth Mint. The Perth Mint is not a financial adviser. You should consider seeking independent financial advice to check how the information in this article relates to your unique circumstances. All data, including prices, quotes, valuations and statistics included have been obtained from sources The Perth Mint deems to be reliable, but we do not guarantee their accuracy or completeness. The Perth Mint is not liable for any loss caused, whether due to negligence or otherwise, arising from the use of, or reliance on, the information provided directly or indirectly, by use of this article.



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SIMPLE GUIDE Gold as a hedge against financial calamity

Topics [ gold investing simple guide ]

Investopedia says a hedge is “an investment to reduce the risk of adverse price movements in an asset”.

In other words, a hedge is an investment that is more likely to move up in value when other assets in a portfolio decline in price.

It has often been observed that gold has an inverse relationship with the stock market. When equities are high, gold can be relatively cheap.

When equities take a marked nosedive, often as not, demand for gold as a safe haven skyrockets.

In this sense, gold can be regarded as ‘insurance’ against financial calamity. In theory, at least, it may help to maintain overall portfolio value.

Our Senior Investment Manager, Jordan Eliseo, turned to recent history to test the validity of the idea.

His chart plots the returns for gold and for equities in the worst five calendar years for Australian equity markets between 1971 and 2019.

“With the exception of 1990, when it was basically flat, gold delivered exceptionally strong gains in the years when equity markets suffered their largest falls,” Jordan reported.

The figures equate to an average increase of almost 40% for gold, whilst the share market saw average falls of almost 25%, he observed.

Jordan’s investigation also revealed that in these years of extreme volatility, gold outperformed bonds and cash as well.

While the data for 2020 is yet to be crunched, it looks almost certain that this year will deliver an even stronger message about the reasons to hedge your portfolio with an allocation to gold.




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