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Why is gold an effective hedge against equity market falls?

Topics [ gold analysis ]

A key reason many investors include a permanent allocation to gold in their portfolio is its historical ability to balance out overall portfolio returns. 

This characteristic remains relevant for many astute investors today as we face ongoing fears about global economic growth alongside geopolitical tensions in the Middle East and the US-China trade dispute.

Gold has helped provide balance because its returns have been typically uncorrelated to those generated by financial assets in general. More importantly it has been negatively correlated to the equity market when that market has fallen, providing diversification when it has been needed most. A look back at last year demonstrates this point.

In Q4 2018, the ASX 200 suffered an almost 10% decline as investor confidence was rattled by fears of a global economic slowdown and indications that the US Federal Reserve would further tighten monetary policy in the world’s largest economy.

Over the same period, the price of gold in Australian dollars rallied more than 10%, helping to protect the portfolios of investors with an allocation to the precious metal.

The performance of gold during this time was not an anomaly.

Instead it was a continuation of a trend that has been in place for more than 40 years, with gold typically serving as an excellent hedge against falling equity markets. Historical studies highlight the fact that gold has typically outperformed all other single asset classes in environments where stock markets have fallen fastest.

For evidence of this consider the table below, which looks at the performance of various asset classes and investment strategies in the quarters that global stock markets suffered their largest losses.

Global asset class returns when global equities suffer their largest quarterly falls

Source: AQR Capital Management, Good strategies for tough times, Q3 2015

The AQR report from which the above table is drawn examined the worst 10 calendar quarters for global equity market returns between 1972 and 2014. As the table makes clear, global equity markets fell by almost 20% on average during these periods.

Hedge funds also performed poorly, as did a 60/40 (60% equities, 40% fixed income securities such as bonds) portfolio.

However what the table above also makes clear is that gold was the highest performing single asset class when equity markets fell fastest, delivering returns averaging 4.20% during those quarters. 

The above findings, which look at global equity markets, are just as applicable to Australian investors.

The table below highlights the same calendar quarters that global equities suffered their largest falls. However instead of looking at global markets, it instead shows the average returns for Australian equities, Australian cash, Australian bonds and gold priced in Australian dollars.

Australian asset class returns when equities suffer their largest quarterly falls

Source: The Perth Mint

There are two key insights that can be drawn from the table above. The first and most important is that for Australian investors, gold has been, by a considerable margin, the highest performing single asset class when equity markets have fallen by a significant amount. 

The second is the degree of correlation that exists between equity markets across the globe. In all 10 quarters referenced that global equities fell, Australian shares also declined significantly. 

Therefore Australian investors who buy international shares for alternative sources of returns are unlikely to achieve true diversification because global equity markets tend to move in the same direction concurrently. 

Gold, on the other hand, has provided more robust portfolio diversification because it is generally uncorrelated to equities and performs best when equity markets are weakest. 

This can be seen in even more detail in the chart below which shows returns on the equity market (dark columns) and gold (gold columns), during the five worst calendar years for Australian equity markets between 1971 and 2018.

Gold and equities annual returns (%) in five worst calendar years for equities

Source: The Perth Mint 

The chart above shows that 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, with an average annual increase across these five calendar years of almost 40%. 

What about when equities rise?

Given gold has historically performed well when equity markets have fallen, it should be no surprise that its performance hasn’t been as strong in environments when equity markets have rallied. This is because, in environments where equity markets are rising, investors are less likely to seek out safe haven assets. However, crucially, gold has still on average generated positive returns in rising equity markets. 

The graph below, which uses market data from 1971 to 2018 inclusive, helps illustrate this point. It shows the average return for equities and for gold in the months, quarters and years when the equity market has risen, as well as when the equity market has fallen.

For example, the graph is telling us that: 

  ⦁ The average return for equities in the months when equities rose was 4.21%, while in those same months equities rose the average return on gold was 0.79%.
  ⦁ The average loss on equities in the quarters when equities fell was 6.53% and in those same quarters when equities fell, the average return on gold was 3.63%.

Average gold and equity returns when equities fall and when equities rise

Source: The Perth Mint

The graph reinforces the point that during periods when equity markets have rallied, gold has tended to rise too. When equities have declined, gold has on average delivered stronger returns, which is why it has been so effective at helping to manage overall portfolio risk. 

This is one of the main reasons gold has become known as a safe haven asset and why it continues to be held by many investors within a basket of assets. 

Gold’s defensive qualities are particularly relevant given the environment Australian investors find themselves in today, with historically low and in many cases negative real yields on traditional defensive asset classes. These include cash and government bonds. 

Combined, these factors present compelling reasons to look at investing in gold.

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Why hold gold in a portfolio?

For millennia gold has been sought after for both its beauty and its functionality. It has often served as money and to this day investors ranging from individuals to central banks hold the metal as a trusted store of value.

One of the main reasons many astute investors allocate 5-10% of a diversified portfolio to gold is the asset’s history of delivering attractive long-term returns.

Gold’s long-term outlook 

The price of gold rose from below USD 40 per ounce at the beginning of the 1970s to USD 1,550 per ounce in September 2019.

Gold has also performed well relative to other asset classes, as illustrated in the following graph. It shows the returns on gold as well as the capital return on stocks, and the total returns on cash and US Treasuries, over multiple time periods from the end of 1971 to the end of 2018. 

Source: Portfolio Visualizer, London Bullion Market Association, St Louis Federal Reserve, www.macrotrends.net, The Perth Mint. Chart covers time period from December 31 1971 to December 31 2018. Indices Used: Stocks: S&P 500, Gold: London Bullion Market Association Gold Fix Price, Cash: 1 month Treasury Bills, Treasuries: 10 Year US Treasuries. The referenced indices are shown for general market comparisons and are not meant to represent the Fund.  Investors cannot directly invest in an index. Past performance does not guarantee future results.

With stocks recovering from their more than 50% declines witnessed during the global financial crisis, it is not surprising they have outperformed gold over the past seven to 10 years.

However this has not stopped the yellow metal from being the highest performing asset class over the past 20 years.

Since the end of the 1971, gold has risen by more than 7.5% per annum, outperforming cash and US Treasuries over this time period.

With the recent gold price rally buoying the precious metal by more than 26% in the 12 months ending August 2019, the case for gold remains compelling.

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Metals pull back after strong rally

Topics [ gold analysis ]

Monthly Review – September 2019

A widely anticipated interest rate cut by the Federal Reserve wasn’t enough to stop precious metal prices from easing in September, with the price of gold falling back below AUD 2,200 and USD 1,500 per troy ounce. 

In percentage terms AUD gold dropped 3.35%, whilst USD gold declined by 3.15%. This brought an end a very strong run in the yellow metal which had seen the price rally by more than 35% (AUD terms) and 26% (USD terms) in the year-to-end August 2019. 

Declines in silver were even more significant during September, with prices falling by more than 7% in both AUD and USD terms, with the Gold to Silver ratio (GSR) ending the month above 86:1.

The minor correction in precious metals that we saw in September owes to several factors, including:

An uptick in yields. The United States 10-year bond yield rising to 1.67% by the end of September, whilst 10-year Australian government bond yields rose to 1.01%, up from 0.89% at the end of August 2019. Increases in yields effectively increase the opportunity cost of investing in gold and can put downward pressure on prices.

A slow grind higher in equity markets, with the ASX 200 in Australia and S&P 500 in the United States up by 1.27% and 1.72% respectively during September. 

Continued strength in the US dollar, which is often a headwind to gold price appreciation. The USD index was up a further 0.46% in September 2019 and is now at its highest levels since mid-2017.

More than anything, the price fluctuation in gold and silver during September can be attributed to an element of buying exhaustion, with the 12-month rally in precious metals leading into last month the strongest we have seen in eight years. 

The strength of the rally and how it compares to prior movements in the gold market can be seen in the chart below, which shows the rolling 12-month performance of gold (priced in US dollars) from 2000 to 2019.

Source: Reuters, The Perth Mint

After such a strong move, it is only natural that the market would take a breather. We alluded to this in our August 2019 monthly report when we noted that “no market goes up (or down) in a straight line, with some volatility along the way to be expected, especially in the short term”.

To that end, the decline in prices that we have seen in the past few weeks looks like a textbook consolidation and one that could be a healthy development for the market. Going forward, the bullish case for gold is supported by many factors including: 

Continued buying from central banks. An early October 2019 report from Bloomberg noted that the People’s Bank of China had added an additional 5.9 tonnes of gold to their reserves in September, bringing total purchases above 100 tonnes in the past 10 months. Poland, Turkey and Russia have also purchased more than 100 tonnes of gold in the year-to-end August 2019, highlighting the strength and persistence of central bank demand for gold. 

Inflows from ETF investors who continue to accumulate gold. Data from the World Gold Council for September 2019 suggests global gold ETF holdings rose by 3% for the month, with total holdings now topping 2,800 tonnes, a new all-time high. The Perth Mint’s own products including PMGOLD, which is listed on the ASX, and AAAU, which is listed on the NYSE, grew by more than 7% during the month. 

Monetary easing from global central banks. This continued unabated throughout September with the US Federal Reserve delivering a cut to the Federal Funds rate. The European Central Bank reduced its main deposit rate to -0.5% and launched a new bond-buying program. Locally, the Reserve Bank of Australia left rates unchanged in September, though did deliver a cash rate cut in early October, with interest rates falling below 1% for the first time ever. 

Negative yielding debt. Whilst bond yields recorded a minor increase in September, there is still approximately USD 15 trillion in negative yielding debt which will continue to drive demand for gold. 

Finally, recession fears are not likely to abate any time soon. Global manufacturing data continues to decline in much of the developed world in a downward trajectory that has been evident since early 2018.

The problem is particularly acute in the Eurozone, especially Germany. Typically the powerhouse of the European economy, the country’s purchasing managers index for September was recorded at just 41.7, indicating a notable decrease in activity. 

The combination of these market factors makes it unsurprising that analysts are still bullish about gold. UBS recently forecasted a rise in the gold price to USD 1,730 per troy ounce in 2020, noting that “An environment of negative and lower-for-longer real rates, slowing growth with downside risks and elevated uncertainty strengthens the case for holding a strategic gold allocation.”

Goldman Sachs are also optimistic. According to a Kitco article from early October, their analysts predict that gold will rise to USD 1,600 per troy ounce in Q4 2019 and potentially remain at this level into 2021. They also note that prices could head much higher should the US edge closer to a recession. 

Importantly, Goldman indicates that there is still potential for a significant increase in gold holdings by investors, noting that: “Gold remains a great strategic allocation because ETFs and especially North American portfolio managers remain underinvested in our view. And there is a great capacity for them to enter the market if global conditions deteriorate further.” 
We agree with many of the sentiments shared by Goldman and UBS and likewise remain optimistic on the outlook for precious metals in the medium-to-long term. 

This is not to discount the possibility of a more meaningful correction or period of sideways trading in the weeks ahead, but rather an acknowledgement of the monetary and economic climate investors around the world find themselves in today. 

As investors continue to seek to protect and build wealth, we believe an increasing number will see the benefits of allocating a portion of their portfolio to precious metals and will respond accordingly.


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.

Articles referenced

China Gold Acquisition + Central Bank Buying



Gold Prices to head toward USD $2000


UBS Doubles Down on Gold


Goldman Sachs – Gold to $1600


Chris Weston - Pepperstone on Gold


Yardeni Research on Manufacturing


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Monthly Sales – September 2019

Topics [ bullion coins sales and mintage figures bullion bars ]

Total ounces of gold and silver sold by The Perth Mint in September 2019 as coins and minted bars:

  - Gold (Au): 46,837 oz

  - Silver (Ag): 1,350,038 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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‘Double Kook’ marks the 30th anniversary of the Australian Kookaburra Silver Bullion Coin

Topics [ buy silver bullion online Australian Kookaburra buy silver coins ]

Celebrating a landmark achievement, the 2020 Australian Kookaburra Coin Series features a special 30th anniversary coin design affectionately dubbed the ‘double kook’.

The reverse image portrays original artistry of the kingfisher in a pose familiar to many Australians. 

Perched on a corrugated rooftop at dawn, the kookaburra is depicted in the midst of its morning chorus as it greets the day with its infamous cackling laugh. Also included is the inscription is ‘AUSTRALIAN KOOKABURRA 30TH ANNIVERSARY’.

The obverse features a representation of Stuart Devlin’s depiction of a kookaburra on a tree stump surrounded by native foliage, as it appeared on the 1990 Australian Kookaburra Silver Bullion Coin. The anniversary dates ‘1990-2020’ are also included together with a miniature representation of Jody Clark’s effigy of the Queen. 

A long-standing favourite among silver coin investors worldwide, the Australian Kookaburra’s enduring popularity has seen it sell close to 9 million coins across its 30-year life. 

The graphic below celebrates 30 years of the Australian Kookaburra with a look back at all the memorable designs to have graced this iconic series. 

30 years of the Australian Kookaburra silver bullion coin

Click here to purchase 2020 Australian Kookaburra 1 kilo, 10oz and 1oz releases.

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The Perth Mint announces early release of iconic Australian Kangaroo silver bullion coin

Topics [ Australian Kangaroo buy silver bullion online buy silver coins ]

We are pleased to announce that the 2020 silver kangaroo bullion coin is available for sale from The Perth Mint today, Friday 20 September. 

While the Australian Kangaroo gold bullion coin has been released annually since 1989, it was not introduced in silver until 2015. In the four years since, The Perth Mint has sold more than 26 million 1oz silver bullion coins worldwide. 

In keeping with tradition, this year’s silver issue depicts a representation of Stuart Devlin’s red kangaroo, a much-admired portrayal created for the Mint by the Queen’s former goldsmith in 1989.

The Perth Mint's 2020 Australian Kangaroo 1oz Silver Bullion Coin is now available.

Originally slated for release on 4 November 2019, the 2020 Australian Kangaroo 1oz Silver Bullion Coin has been introduced early due to strong demand for remaining stocks of the 2019 release which are now almost exhausted.

The 2020 Australian Kangaroo gold and platinum bullion range will be available for purchase from the previously-announced release date.

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