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Metals rally as Federal Reserve eases again

Summary

Precious metal prices rallied in October, led by silver which rose by more than 6.5% in US dollar terms
Gains for Australian investors were moderate due to the increase in the AUD
Global gold ETF holdings continued to grow, rising by more than 2% for the month
New research highlights long-term demand for gold will be supported by low-to-negative yields on fixed income investments

Risks in equity markets and pessimism among US company CEOs support role of gold as a risk hedge in current market environment


Full monthly review - October 2019

October was a positive month for US gold and silver prices with the precious metals rising 2.77% and 6.65% respectively. Returns for Australian dollar (AUD) investors were also favourable, with silver up by 4.34% and gold 0.61% in local currency terms.

The more modest returns seen by Australian investors can be attributed to the increase in value of the AUD which closed the month trading just below USD 0.69. This occurred despite the widely anticipated interest rate cut by the Reserve Bank of Australia, which reduced the local cash rate to a new all-time low of just 0.75% in early October. Long-term government bond yields in Australia rose across the month which contributed to the rise in the AUD.

The AUD wasn’t the only currency to gain during October. The USD lost more than 2% of its value against several key currencies, as measured by the USD index. 

The weakness in the dollar was driven by a number of factors including ongoing trade tensions between the United States and China, and the 0.25% interest rate cut delivered by the US Federal Reserve in late October. This brought the US federal funds rate target range down to 1.50–1.75%.

ETF flows positive

October saw another positive month for global gold ETF flows, with preliminary estimates based on Reuters data suggesting global gold ETFs increased holdings by more than 2%. 

As has been the case for much of the last 12 months, demand in Australia was particularly strong. This is evidenced through the growth of The Perth Mint’s own ASX-listed gold product (ticker: PMGOLD) which saw a more than 4% increase in the size of its holdings in October alone. 

The product has grown by 40% in the past year, more than double the global average, as Australian investors allocate capital to precious metals.

Long-term drivers in place

One of the likely long-term drivers for gold will be the extremely limited-to-negative real returns available in traditionally safe, fixed-income assets such as government bonds. 

In the early 1980s, investors in the United States and Australia could earn yields of more than 15% by investing in longer-term government bonds. Returns have been falling ever since, driven by one of the greatest bond bull markets in recorded human history. 

The movement in the United States bond market across the past four decades has been so extreme that, according to a late October 2019 research report from the World Gold Council (WGC), the bond market now has:

More than USD 13 trillion in negative yielding debt globally
Negative real yields for the vast majority of developed market sovereign debt
Negative nominal yields for 26% of developed market sovereign debt

Titled Investment update: It may be time to replace bonds with gold, the WGC report noted that considering the yield environment investors face today, institutional asset managers may benefit from increasing the gold allocations within their portfolios. Specifically, the WGC stated that “for a hypothetical average pension fund portfolio, the optimal allocation (to gold) with the maximum risk-adjusted return increases from 4.2% to 6.6%”.

The research also highlighted gold’s historically strong performance in low real interest rate environments, with WGC findings indicating that gold priced in USD has on average delivered annual gains of 15% when real rates were below zero. 

This WGC data aligns with research undertaken by The Perth Mint as presented at the recent investor seminar ‘Gold: Why, How, Now’.

The below chart shows the annual average nominal return for gold priced in Australian dollars, as well as Australian stocks and bonds, in years where Australian real interest rates were below 2% between 1971 and 2018. 


Annual average performance (%) when real interest rates below 2%
1971 to 2018

Annual average performance when real interest rates below 2% 1971 to 2018

Source: The Perth Mint, SMSF Whitepaper July 2019

As the chart highlights, gold not only delivered strong average annual gains of more than 20%, but it also comfortably outperformed stocks and bonds in these years.

Based on data from leading superannuation company Chant West, the chart below shows the average performance of Conservative, Growth and All Growth superannuation strategies in calendar quarters that saw these portfolio values decline. The research covers data gathered between the early 1990s and June 2019. 

The chart also highlights the average performance of bonds and gold in those same quarters.

Performance (%) during quarters where superannuation strategies declined

Performance during quarters where superannuation strategies declined

Source: The Perth Mint, Chant West

The data found an average performance gap of 9.65% between gold and the superannuation strategy that declined in value, and 2.63% between gold and bonds, evidence of the benefits gold can bring to an institutionally managed portfolio. 

Gold has two additional attributes worth mentioning in the context of the above findings. Unlike the bond market, gold has no credit or long-term inflation risk. Both of these risks impact fixed income investments to one degree or another. 

These qualities unique to gold are likely to become more relevant to institutional asset managers in the years to come, especially if official consumer price inflation readings –  which today are at the lower end of their historical ranges across much of the developed world – end up rising back toward their long-term averages. 

Taken as a whole, the findings contained in the charts and WGC research discussed above bode well for institutional gold demand in the years ahead. 

Economic and market risk factors still present

Gold is expected to continue to find favour among investors looking to hedge against equity market and economic risk. While the S&P 500 hit new all-time highs in late October and remains supported by monetary tailwinds, there is no shortage of risk factors for investors to navigate. Examples of this include:


A recent Bank of America Merrill Lynch update which suggested long-term profit growth forecasts have tumbled in the US
Recent CEO Confidence surveys indicating a pessimistic outlook, with CEO confidence plunging to levels that coincided with the beginning of the last four recessions in the US.
A plethora of profitless IPOs entering the market, with research suggesting more than 80% of IPOs in 2018 were for companies that were losing money. That’s the highest number since the tech bubble in 1999–2000.


In addition to the above, the seemingly unstoppable rise of stock buybacks in the US are on track to top USD 900 billion in 2019 according to current estimates. 

These buybacks, of which USD 5 trillion took place between 2009 to 2018, have been an important driver of earnings per share growth and the rise in the stock market across the past 10 years. 

Going forward however they represent a barrier to growth. Every dollar paid back to shareholders through buybacks, as well as through dividend payments, is a dollar that companies by definition cannot invest in their own enterprise. 

Short term, these factors do little to protect gold investors from the volatility inherent in highly liquid assets however medium-to-long term they may enhance the case for gold in a well-diversified portfolio.

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.

Articles referenced

Record buybacks of US stock
https://www.livewiremarkets.com/wires/the-unintended-consequences-of-ultra-low-interest-rates

S&P 500 hits all-time highs
https://edition.cnn.com/2019/10/28/investing/sp-500-dow-stock-market-today/index.html

The outlook gap – chart of CEO confidence
https://blog.evergreengavekal.com/the-outlook-gap/

Bank of America Merrill Lynch chart on profit expectations
https://www.zerohedge.com/markets/gold-bonds-stocks-rally-dollar-dives-trade-hope-fedspeak

Profitless IPOs
https://stansberryresearch.com/articles/the-ipo-frenzy-rolls-on-2/



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Perth Mint Gold (ticker: PMGOLD) hits four tonnes in holdings

Topics [ PMGold Perth Mint Gold ]

This year has been a prosperous time for gold investors, with prices rising by almost 30% in the 12 months to end October 2019. The price also topped AUD 2,000 per troy ounce for the first time ever.

The increase in the gold price, which has been driven by multiple factors including three interest rate cuts by the Reserve Bank of Australia, has led to a notable rise in demand for gold across The Perth Mint’s range of investment products.

This includes The Perth Mint’s ASX listed gold product, ticker: PMGOLD. On Monday 4 November, PMGOLD reached 4 tonnes in total gold holdings, with the market value of the product now in excess of AUD 275 million. This is a direct result of the huge inflows we’ve seen into the product this year and the rise in the gold price.

Designed to track the price of gold in Australian dollars, PMGOLD can be bought and sold like a regular share, which makes it highly accessible to any Australian investor with a brokerage account. Each unit of PMGOLD represents 1/100th of a troy ounce of gold, with the physical gold which backs the product stored at The Perth Mint.

Unique in the market, PMGOLD offers a number of features making it particularly attractive to Australian investors. These include:

 • A management fee of only 0.15%, making it the lowest cost gold product on the ASX;

 • A government guarantee on the gold backing each unit, making it a trusted investment option; and

 • A redemption process whereby investments in PMGOLD may be exchanged for physical Perth Mint gold products such as bars and coins, which are deliverable upon request anywhere in Australia.

If you already trade shares, PMGOLD is a very easy way to incorporate gold into your portfolio. You can find out more about PMGOLD by downloading the latest fact sheet here.

Perth Mint research makes case for gold

Supporting the case for precious metal investment today is the historical outperformance of gold in low real interest rate environments.

Exclusive research conducted by The Perth Mint, which looks at the performance of various Australian asset classes between 1971 and 2018 found that gold outperformed both stocks and bonds in years where real interest rates were 2% or lower, with an annual average return of just over 20%.

These findings are highly relevant for all Australian investors given real interest rates are already negative today, with yields on longer term government bonds indicating we may be in low interest rate environment for at least another decade.

You can read this research in full here

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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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.

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.

Articles referenced

China Gold Acquisition + Central Bank Buying

https://www.bloomberg.com/news/articles/2019-10-07/china-s-gold-buying-spree-tops-100-tons-amid-prolonged-trade-war

https://www.gold.org/goldhub/gold-focus/2019/10/dont-stop-me-now-central-bank-demand-august

Gold Prices to head toward USD $2000

https://www.cnbc.com/2019/10/03/investing-in-gold-bullion-could-soar-to-2000-next-year.html

UBS Doubles Down on Gold

https://www.forbes.com/sites/simonconstable/2019/09/30/ubs-doubles-down-on-gold--ups-its-forecast-again/#32827b5b122f

Goldman Sachs – Gold to $1600

https://www.kitco.com/news/2019-10-03/Gold-is-going-to-1-600-next-watch-the-perceived-risk-of-recession-Goldman-Sachs.html

Chris Weston - Pepperstone on Gold

https://pepperstone.com/au/market-analysis/daily-fix-xauusd

Yardeni Research on Manufacturing

https://www.yardeni.com/pub/ecoindglpmimfg.pdf



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Precious metal prices continue to climb

Topics [ invest in gold ]


August 2019 update

August was another solid month for precious metal investors, with the price of gold rising by just over 7.5% in USD terms. The Australian dollar gold price closed the month above AUD 2,250.00 per troy ounce, up more than 9% for the month.

Silver investors fared even better, with the price rising by almost 13% in USD terms, while silver priced in Australian dollars closed the month above AUD 27.00 per troy ounce. 

The strong performance for August continues what has been a positive year for precious metals bulls, with gold and silver up 36% and 26% respectively. The precious metals have strongly outperformed risk assets such as shares, with the ASX 200 and S&P 500 up just 4% and 1% respectively over the same time.

What’s driving the gold price?

The drivers of the gold price over the past year are now well established.

First is safe haven buying as recession fears around the world intensify. The uncertainty has been driven by the continued escalation of the US-China trade war and the recent inversion of the US yield curve.  Historically a very reliable recession indicator, an inverted yield curve occurs when long-term interest rates are lower than short-term interest rates.

The continued plunge in global bond yields is also driving demand for gold. In August, the market value of negative yielding debt rose beyond USD 17 trillion, with 30% of all investment grade securities now having yields below zero.

Given gold now has a higher yield than all these negative yielding bonds (and carries no credit risk) it is no surprise that it has benefitted from the rapid decline in global bond yields. In Australia, for example, the 10-year government bond yield has dropped by 65% over the past year.

Central banks also continue to be active in the gold market, buying more than 220 tonnes of gold in Q2 2019. That is a 47% increase on Q2 2018, with central banks on track to purchase more than 650 tonnes this year, according to recent research released by ANZ Bank.

What happens next?


After such a large rally in the gold price over the past year, a period of consolidation would not be unusual. No market goes up (or down) in a straight line, with some volatility along the way to be expected, especially in the short term.

Two indicators worth monitoring are managed money positioning in the futures market and the gold to silver ratio (GSR).

Below we share our thoughts on what these indicators are telling us and share two charts that help illustrate current conditions in precious metals markets.

Managed money positioning in effect represents the bets that shorter term traders such as hedge funds have made in the gold futures market. Managed money participants can and will bet that the gold price is going up or down based on their view of the market.

The chart below shows gross long positions (blue shaded area) and gross short positions (red shaded area) from 2009 to today. These positions effectively represent how many bets have been made that the price will rise (longs) and how many bets have been made the price will fall (shorts). You can also see movements in the gold price in USD terms over the same time period on the chart.

The chart is telling us that over the past year those betting the gold price will fall have drastically wound back their positioning, reducing them from almost 200,000 futures contracts to barely 20,000 today.

On the long side, those betting that the price will rise have significantly increased their exposure. Gross long exposure is now back at levels seen in the aftermath of the Brexit vote and the 2016 US Presidential election. 

Managed money participants are bullish on gold, some would say exuberantly so, and their actions have been a major contributor to the rise in the gold price of gold over the past 12 months.

The second indicator we mentioned, the GSR, can be seen in the chart below. It highlights movements in the GSR (the crimson line on the chart) from December 1999 to the end of August 2018, as well as a long-run average (black line). The chart also shows the movement in the USD price of gold over the same time period (gold line). 



As you can see the GSR is currently falling, approaching 80:1, which means silver is outperforming gold. Many will interpret this as a signal that the current precious metals bull market has longer to run as previous periods of silver outperformance (2002 to 2006 and late 2008 to 2011) coincided with strong rises in the price of precious metals.

Outlook for gold still bright


Though we are cautious about the outlook for prices in the short-term, we remain confident in the outlook for gold in the years ahead. Going forward we expect investment demand for gold to be supported by many factors including:

Despite their recent volatility, many share markets are still trading at or near all-time highs. Given gold has a long track record of outperforming when share markets decline, we expect demand to be bolstered by investors seeking a hedge against equity market declines.

Continued recession fears are not likely to abate any time soon, with recent global manufacturing data from JP Morgan indicating a global slowdown is underway. This will continue to boost safe haven demand for gold.

Cash rates are still likely to fall in the coming months, with markets expecting another rate cut by the US Federal Reserve in September. In Australia, markets expect the local cash rate to be cut to just 0.50% by May 2020. Low rates can be expected to support gold demand given they reduce the opportunity cost of investing in the yellow metal.

Add all these factors together and it is easy to understand why astute investors are likely to continue incorporating an allocation to gold as part of a diversified portfolio in the years ahead.

Jordan Eliseo
Senior Investment Manager
The Perth Mint
9 September 2019

Sources

JP Morgan Global Manufacturing
https://www.markiteconomics.com/Public/Home/PressRelease/cd5ff69a25e34fb29f365f8c87d5ed5d

Central Banks and Gold
https://centralbankgold.org/gold-reserve-asset
https://www.bloomberg.com/news/articles/2019-08-27/central-bankers-new-found-love-of-gold-seen-bolstering-demand

Negative Yields
https://www.livewiremarkets.com/wires/the-bizarre-world-of-negative-interest-rates
https://www.bloomberg.com/graphics/negative-yield-bonds/

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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