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Gold, Bitcoin and the Elon effect

bitcoin on laptop keyboard

“Bull markets are born on pessimism, grown on scepticism, mature on optimism, and die on euphoria” – John Templeton

It’s been just over three years since we last wrote about bitcoin, back when it was going through its first investment mania, with the price nearing USD 20,000 per coin at its peak.

From late 2017 through to March of last year, the bitcoin price collapsed, falling as low as USD 3,185 over this period, with investor interest and media coverage also waning. 

No matter whether you think bitcoin is a Ponzi scheme, the future of money, or something in between, there is no doubting it is front page news again.

The decision by Elon Musk, CEO of US electric vehicle company Tesla, helped push the price above USD 50,000 per coin in February 2021. 

Since early March 2020, when it was trading below USD 5,000, bitcoin has rallied by more than 900%, with ever more optimistic price forecasts being issued by the day. 

Given much of the rally in bitcoin has occurred since August, which has coincided with a long overdue pullback in gold (see chart below), there are no shortage of commentators stating that the precious metal is being usurped by its digital counterpart. Some have gone so far as to encourage investors to drop gold and reallocate to bitcoin instead.

Gold and Bitcoin prices – December 2019 to February 2021

graph

Source: World Gold Council, LBMA, Coinmetrics, data to morning of 17 February 2021 

In our latest report, Gold, Bitcoin and the Elon effect, we question this narrative and highlight the multiple attributes by which investors can, and indeed should, compare these two investments. 

With one notable exception, gold would appear to have a handful of advantages that the world’s most famous cryptocurrency will never catch.

Here are some key insights to consider:
  • Bitcoin beats gold hands down from the perspective of generating speculative returns in rapid fashion, but is 12 times more volatile than the precious metal.

  • The gold market is significantly larger in terms of overall value, with a market capitalization that is more than 10 times the bitcoin market.

  • The gold market is substantially more liquid, averaging approximately 90 times the daily turnover of the bitcoin market in 2020.

  • Free storage options for gold are much lower risk than free bitcoin storage options, given the counterparty risk inherent in the latter.

  • Gold is a lower cost investment than bitcoin, with gold ETPs like Perth Mint Gold (ASX:PMGOLD) offering gold exposure for 0.15% p.a., versus 1-2% p.a. for existing bitcoin products.Multiple uses of gold – for investment, as a reserve asset, as a display of wealth in jewellery form, and in industry, are far more diverse than bitcoin’s, which is almost exclusively used for speculation, with payment volumes across the cryptocurrency network declining in the last three years.

  • Gold has a multi-millennia track record as a store of value and has been the best performing asset in equity market corrections over the past 50 years. In contrast, it is far too early to say that Bitcoin is a store of wealth. This is no fault of bitcoin per se, rather an acknowledgment that it has only existed in an era of low inflation, economic expansion (up until COVID-19), and a record bull market run in equities.

  • Gold’s network effect is far stronger than bitcoin’s, best evidenced by the perpetual marketing of bitcoin itself as digital gold. Gold is not marketed as analog bitcoin.

  • Bitcoin remains under threat, both from hard forks of the bitcoin network itself, as well as thousands of other cryptocurrencies, whereas gold’s status remains rock solid (pun intended).  

  • The gold market is far more decentralized than the bitcoin market, with the precious metal mined, refined, and owned by central banks, households and investors the world over. Bitcoin on the other hand is predominately held by a small group of owners, while mining is overwhelmingly concentrated in one country.
There are two extra points worth making, which have nothing to do with gold vs. bitcoin per se, but rather the idea that many corporations will follow Tesla’s lead and also invest part of their treasury into bitcoin. 

The first point is that we remain unconvinced this will happen, as most CEOs and company boards will not willingly take on the risk it would bring into their business, while the attention it will by definition take away from core operations another factor to consider. It’s also not immediately clear why a business with excess cash wouldn’t just return it to shareholders, either via dividends or buybacks. 

Secondly, if it does happen, we can’t help but feel it would represent a massive vote of no confidence in monetary policy settings. Rather than encouraging more capital investment, negative real rates would appear to be encouraging non-financial corporations to turn themselves into quasi-asset managers. 

Note that none of the above should be seen as a bearish case for bitcoin per se. Whilst the parabolic price move is a bubble warning sign, and it’s hard to think of a more euphoric moment than the world’s richest man using company money to invest in this nascent asset class, we have no real view on where bitcoin is heading. 


Rather, it’s an attempt at a balanced look at what the rise of cryptocurrency is telling us about financial markets and the economy, and the many attributes by which investors might judge both bitcoin and gold, which remain two vastly different investment propositions.

For a variety of reasons the precious metal will still likely be the preferred investment option for risk conscious investors looking to protect capital in the years ahead.

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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Wall Street Bets on silver squeeze as gold eases

wall st sign

Precious metal markets were mixed in January, with gold down marginally, while silver rose. While long-term drivers remain supportive, the current euphoria in financial markets, an increase in bond yields, and rising optimism regarding a huge economic stimulus package from Washington, have acted as short-term headwinds for precious metals, which remain in a consolidation phase. 

Summary of market movers:

The USD gold price fell marginally in January, ending the month at USD 1,863.80 per troy ounce (/oz) 

Silver ended the month above USD 27/oz, rising by more than 3%, with the gold to silver (GSR) ratio finishing January at 68

Risk assets continued to rally, with equities and cryptocurrencies hitting all-time highs 

A mania in meme-stocks and rumours of a short squeeze in silver captured market attention in late January, with volatility surging in select company share prices 

The announcement of an additional AUD 100 billion in Quantitative Easing (QE) from the Reserve Bank of Australia (RBA), and a decline in iron prices may mark a top in the Australian dollar, which traded as high as USD 0.78 in January 


Full report - January 2021

The price of gold eased marginally in January, falling by 1.26% to end the month at USD 1863.80/oz. Silver fared better, rising by 3.5% to USD 27.42/oz, with the GSR falling to 68 by the end of last month, after starting the year at 71. 

Multiple factors contributed to the soft start to the year for gold, including the change in the White House, and Democratic Party wins in the Georgia Senate election runoff, which raised hopes of a circa USD 2 trillion economic stimulus package.

This was enough to see yields on US treasury securities rise by almost 25% (from +0.93% to +1.15% on the US 10 year) by mid-January. Real yields increased as well, though are still negative, with these moves in the bond market coinciding with an approximately 6%, or USD 110/oz fall in the USD gold price intra-month. 

The chart below highlights this, showing movements in the USD gold price (gold line) and the real yield on a US 10-year treasury (black line), across the course of January. Note that yields are inverted on the chart, that is, a falling in the black line means real yields are rising, and vice-versa.

line graph

Source: The Perth Mint, World Gold Council, US Treasury

The other factor holding gold back in January was the continued euphoria building in financial markets, with the Citigroup Panic/Euphoria model hitting all-time highs in January 2021. 

Furthermore, a range of metrics from stock market capitalization to GDP ratios, to price/earnings and price/sales ratios for the S&P 500 suggest the US stock market is now as or more expensive than it has ever been, with investment legend Jeremy Grantham warning investors last month that markets have now “matured into a fully-fledged epic bubble”. 

Signs of excess, which are no doubt temporarily limiting the safe haven appeal of precious metals, weren’t limited to traditional asset classes. Cryptocurrencies also hit all-time highs, with Bitcoin trading above USD 40,000 per coin in early January, though it did pullback as the month unfolded. 


Wall Street Bets, Gamestop and the silver squeeze

The most eye-catching development in financial markets in the first few weeks of 2021 was the rise of Wall Street Bets (WSB), a reddit sub-thread of retail investors that discuss investment opportunities in financial markets. 

Over the course of January and early February, a number of people that were members of WSB encouraged the broader group to aggressively buy shares and call options on listed companies that hedge funds were shorting, meaning the hedge funds would benefit if the stock prices fell. 

The idea was that by aggressively buying shares and options, the WSB could force a “short squeeze” and a “gamma squeeze” (note we have links at the bottom of this article for those who’d like to read more about these terms) combined. 

This would see financial institutions that were either short the shares in those companies, or who had sold call options over those companies need to aggressively buy stock as well, to manage their risk.

And for a few short days, the strategy “worked” spectacularly. 

The most high-profile company caught up in this was GameStop (ticker: GME), which over the course of January rose from below USD 20 per share to more than USD 450 per share (based on intraday pricing). A very select group of people purportedly made millions from the price spike in GME through the use of derivatives.  

Sensing an opportunity to make vast gains in a short period of time, as well as get one up on hedge fund and institutional investors, the WSB group has supposedly grown to more than seven million members. In many ways this should not have been unexpected, given the tailwinds that have driven this phenomenon, including:

Many people with excess time on their hands due to COVID-19 lockdowns and higher unemployment 

“Free” money from government stimulus checks

“Free” trading on certain investment platforms 

Rising inequality and frustration with “elites”, particularly those in financial markets 

Toward the end of last month, the attention of the WSB community turned to precious metals, with an attempt to create a silver squeeze generating lots of attention in financial markets and the news media.

Whilst there are a number of reasons to remain confident in the outlook for silver in the months and year ahead, the silver squeeze narrative is at best a distraction, and at worst a risk for investors, at least in the short-term.

Firstly, it needs to be stated that liquidity in the global silver market, and precious metal markets generally, is an order of magnitude more significant than liquidity in any of the individual stocks caught up in the recent WSB mania. That makes it a much harder market for anyone to “squeeze”, especially retail investors with smaller amounts of investment capital. 

Secondly, whilst some investors have bought into a narrative of commercial banks being short silver, they are typically only looking at futures market data, which is public information updated on a regular basis, to draw that inference.

Those investors, and certain sections of the precious metal community that relentlessly promote this narrative are completely ignoring the fact there is a large over-the-counter (OTC) market in precious metals. Given this fact, whilst certain financial institutions might be short silver (or gold) futures, they may well, and indeed are most likely long those precious metals in the OTC market at any given time.

Thirdly, it is worth pointing out that whilst there may be shortages of silver in specific form (i.e. small bars and coins) and in specific locations, that in no way evidences a shortage of silver itself. 

Fourthly, it is worth pointing out that at present, managed money positions in the silver market are net long, with data as at 26 January showing a gross long position of 67,430 contracts and a gross short position of 23,110 contracts. 

This means that on balance speculators are betting prices will rise rather than fall. That rather destroys the WSB narrative of hurting hedge funds by buying silver, given the hedge fund community would benefit from a rising silver price. 

As a final comment on this phenomenon, while undoubtedly some of the WSB community will have purchased silver (either in bar, coin, ETF or derivative form) in the last week or so, we also think there is a good chance most of the increased buying has actually been driven by existing silver investors. 

It also looks like the price spike in companies like GME is well and truly over, with the share price closing just above USD 92 on Wednesday 3 February, down more than 80% from the highs seen during this phenomenon. 

Is the Australian dollar topping out?

The AUD rose by 40% from just below USD 0.56 to almost USD 0.78 between late March 2020 and early January 2021, with the move driven by a range of factors, including a strong bounce in commodity prices over this time period.  

The broader ‘risk-on’ appetite which has dominated financial markets since governments and central banks began to deploy record levels of stimulus in response to COVID-19 has also helped the AUD, which is treated as a proxy for risk, and is highly correlated to moves in emerging markets.

Whilst some forecasters think the AUD will head to USD 0.80 or higher, there are some signs the currency will instead weaken, with the RBA decision to increase its QE programme by AUD 100 billion helping push the currency lower so far this week.

To add to this, iron ore prices (which had effectively doubled from lows seen last month) are also beginning to fall, with declining profitability in Chinese steel mills, declines in demand, and a robust supply profile suggesting further risk to the downside.

Should that eventuate, it would serve as a headwind for the AUD, and possibly help put a floor under precious metal prices for Australian investors. 

Outlook 

Moving forward, there are some risks to the outlook for precious metals. ETF inflows have slowed (for gold) considerably, as has central bank buying, though both are still positive, whilst consumer demand in key markets like China, India and other parts of Asia and the Middle East will take some time to recover fully.

The potential for the USD to rally after a more than 13% decline over most of 2020 could also be a short-term headwind for precious metals, with the dollar index up 2% since early January. 

Finally, silver’s correction in the past 48 hours despite the silver squeeze and WSB narrative also suggests the precious metal market may consolidate for a while longer, even if the longer-term strategic case for investing in these metals remains undiminished.

The x-factor for gold, and indeed for financial markets as a whole, is COVID-19. While everyone hopes that we have seen the worst and that 2021 marks the beginning of a ‘post COVID’ world, there are no guarantees.

Mutations are beginning to develop, while meaningful parts of the global economy remain locked down. Even the best-case scenario, which would see a successful rollout of vaccines around the world, represents an enormous logistical and political challenge, with global economic output unlikely to catch up to its pre COVID-19 trajectory for years.

Markets are pricing in a best-case scenario right now. If the situation deteriorates, expect risk assets to suffer, policy makers to deploy even more stimulus, and safe haven assets like gold to catch a bid.

Combined, these potential tailwinds indicate that precious metal prices are likely to remain biased to the upside for some time to come. Most importantly, from a portfolio management perspective, assets like gold in particular continue to offer unique diversification benefits to investors, which should see investment flows supported going forward.

Jordan Eliseo
Manager – Listed Products and Investment Research 
The Perth Mint
4th February 2021


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. 

Further information

Short Squeeze
https://www.investopedia.com/terms/s/shortsqueeze.asp

Gamma Squeeze
https://www.swfinstitute.org/news/83341/what-is-a-gamma-squeeze-in-the-context-of-stock-trading

Silver gross short position
https://ycharts.com/indicators/comex_silver_combined_managed_money_short_positions 

Silver gross long position
https://ycharts.com/indicators/comex_silver_combined_managed_money_long_positions




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Gold for financial advisors

Precious metal prices enjoyed another solid year in 2020, with the price of gold rising by more than 20% in US dollar (USD) terms, and approximately 14% in  Australian dollar (AUD) terms.

The solid price increases, coupled with the unprecedented economic challenge posed by COVID-19, and the fiscal and monetary policy response to the pandemic, saw a huge uplift in investment demand for gold.

This was best seen through the rise of gold ETF holdings, which increased by more than 30% globally in 2020. Financial intermediaries working on behalf of Australian investors were very much at the forefront of this demand, with Perth Mint Gold (ASX:PMGOLD), for example, seeing inflows of approximately 70% in 2020, helping make the ETF one of the fastest growing products on the ASX.

Looking ahead, there remain no shortage of challenges for the global economy, which will obviously impact the investment environment. Some of these challenges include:

    • Potential mutations of the COVID-19 virus and the logistical challenge of distributing vaccines globally

    • Signs of excessive speculation in financial markets, from Bitcoin to Special Purpose Acquisition Vehicles (SPACs), to record levels of call option buying

    • Record low real yields in many sovereign debt markets

    • Questions regarding the evolution of fiscal and monetary policy, with developed market governments and central banks sovereigns having already deployed unprecedented levels of stimulus in the last 12 months
Given this backdrop, there remain solid reasons to look at incorporating an allocation to gold in a well-diversified portfolio. 

Some of these include: 

1. Outperformance when real interest rates are low

One factor motivating financial intermediaries to look at incorporating an allocation to gold in client portfolios is the ultra-low interest rate environment, which at this stage looks set to be a feature of the financial landscape for the next decade at least.

As a zero-yielding asset, the opportunity cost of investing in gold is significantly reduced, if not entirely eliminated in environments where real interest rates on cash and term deposits are negative in real terms. 

Historically, gold has thrived in such environments, delivering average nominal gains of more than 20% per annum in years where real interest rates are 2% or lower.

2. Strong track record of protecting portfolios when equities sell off

Gold has historically been the best performing single asset class in environments where equity markets sell off sharply, with allocations to the precious metal helping to mitigate overall portfolio drawdowns. 

This can be seen in the chart below, which shows the performance of gold and of the Australian equity market, in the five worst calendar years for equities between 1971 and 2020, as well as an average across the five years. 

Gold and equities annual returns (%) in five worst calendar years for equities – 1971 to 2020

Source: The Perth Mint, The World Gold Council, Reuters 

Whilst the above chart uses calendar year data, analysis of the interplay between gold and equities on a monthly or quarterly basis demonstrates the same findings. 

Gold’s historical ability to protect portfolio drawdowns may prove particularly attractive to investors in the years to come, given traditional defensive assets like cash and bonds offer such low, and in many cases negative, real returns.  

3. Strong long-term returns

Over the last 15 years, the price of gold in Australian dollars has increased by almost 9% per annum, rising from less than AUD 700 to more than AUD 2,400 per troy ounce.

The precious metal has also outperformed most traditional asset classes and diversified investment strategies over this time period, as seen in the table below.

Australian asset class returns (% per annum) to end 2020


Source: The Perth Mint, World Gold Council

4. Protection against any fall in the Australian dollar

Gold, if bought in unhedged form, provides portfolio protection in the event that the AUD falls. For most Australian investors, this provides useful currency diversification, given the majority of their assets are domiciled in AUD, even if it means their gold position won’t perform as well in environments where the AUD is rising.

5. Simple and low-cost to incorporate into a portfolio

Gold is one of the lowest cost asset classes an adviser can include in a client portfolio, both from the perspective of management fees, and trading spreads.

Analysis of all the ETPs trading on the ASX shows that the average management expense ratio (MER) of the more than 200 products available to retail investors was 0.50%, whilst the average trading spread in December 2020 was 0.25%.

By comparison, Perth Mint Gold (ASX:PMGOLD) has a MER of just 0.15%, and had trading spreads of just 0.08% in December 2020, with both of these costs less than one-third of the average costs for the broader ETF industry. 

How to invest in gold

The Perth Mint offers a full suite of precious metal investment solutions, from traditional bars and coins, through to depository accounts and listed products. 

Most financial intermediaries typically look to invest in Perth Mint Gold (ASX:PMGOLD), which tracks the price of gold in Australian dollars. 


More information 

To access more information on the investment case for gold, download our SMSF Trustee Investment Whitepaper 

To find out more about Perth Mint Gold (ASX: PMGOLD), download our latest investment factsheet

To find out more about the various investment options The Perth Mint provides, visit our website


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 brochure 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 arising from the use of, or reliance on, the information provided directly or indirectly, by use of this article.






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Precious metals rally ends 2020 on a high

fireworks

Precious metal markets capped a strong year with further price increases in December. Silver led the way with a 20% rally, whilst gold rose by 7% in USD terms, to finish the year trading just below USD 1,900 per troy ounce. Gold again outperformed the majority of mainstream asset classes in 2020, with the impact of COVID-19, and the monetary and fiscal policy response to the crises driving demand for precious metals over the year.

Summary of market movers:
The gold price rallied 7% in USD and 3% in AUD terms in December, with the precious metal rising by 25% (USD terms) and 14% (AUD terms) for 2020.

Silver had an even stronger move, increasing by 20% in USD terms in December. Across the entire year, it was up by almost 50% in USD terms.

Silver’s outperformance saw the Gold to Silver ratio (GSR) end the year 71, having fallen from 85 at the end of 2019. 

The Australian dollar (AUD) continued to rise during December, ending the year at USD 0.77. It was up 10% for the year, and almost 40% from the mid- March 2020 low, when it traded down toward USD 0.55.

Share markets also finished the year on a positive note, with the ASX up 1% whilst the S&P 500 was up by more than 3.5%.

Real yields continued to fall during December, with 10 year US Treasury 10 bonds falling from -0.93% to -1.06%. They had started the year at +0.08%  

The USD index also declined in December, falling by 2% to end the year down 7%, having fallen almost 13% since its mid-March high. 

Full report - December 2020 

Precious metal prices ended 2020 on a high, with the USD price of gold and silver rising by 7% and 20% respectively during December. The rally capped a strong year, with precious metals outperforming the vast majority of asset classes. 

From a return perspective, silver outperformed gold, though was substantially more volatile across the year, falling below USD 15 per troy ounce in March, with the GSR topping 110 at the time. 

The strong finish to the year will encourage precious metal bulls that the textbook correction that we saw in gold between mid-August and end November has run its course. 

The strong start to 2021 seen for gold and silver (both are up by more than 3% in the first few days of trading), will only reinforce this belief, with our view on the outlook shared in more detail below.  

A year for the record books 

Whilst most people will be happy to see the back of 2020, it is certainly a year we will never forget, given the emergence of COVID-19, and the impact it had on the economy and in our daily lives. 

In financial markets, COVID-19 and the response to the economic slowdown from fiscal and monetary policymakers was profound, seen through a number of events that transpired across the course of the year. These include:

  • The plunge in equity markets during Q1 2020, which saw the ASX fall by more than 30% in barely a month, one of its sharpest sell offs in history. 
  • The price of oil trading below zero in April 2020, with futures contracts at one-point trading at USD -37.63 per barrel as storage facilities reached capacity limitations, and COVID-19’s impact on demand wreaked havoc across the energy complex.

  • The price of gold hitting all-time highs in nominal terms in August 2020. At one point the precious metal traded above USD 2,050 per troy ounce, whilst in AUD terms, gold was trading at more than AUD 2,800 per troy ounce. The market has had a healthy correction since.

  • The rally in Bitcoin (BTC) and other cryptocurrencies also caught the markets attention. After selling off alongside equities and falling down toward USD 5,000 per coin in Q1, BTC staged a huge rally, and finished the year trading near USD 30,000 per coin. Other crypto's like Ethereum actually outperformed BTC across the year, with investor interest in this space picking up notably

  • A surge in equity markets post the March lows, which culminated in one of the best ever single month returns in November, when the MSCI world rallied by more than 12.50%. 

  • An explosion in central bank balance sheets, which collectively increased by more than USD 8 trillion over the course of 2020. In April 2020, asset purchases by the four largest central banks totalled USD 1.5 trillion, six times the amount purchased at the height of the Global Financial Crisis. 

  • The relentless trend lower in real bond yields, which fell by more than 1.10% (US 10-year Treasuries) to end the year below -1%. 

Amazingly, despite the chaos caused by COVID-19, the majority of asset markets delivered positive returns across calendar year 2020, further evidence that this has so far proved to be a recession unlike any other. 

Outlook for 2021

After a strong price run that has seen gold rise by 59% since September 2018, there are some potential headwinds for the precious metal. 

The first of these is the fate of the USD. Since March of last year, the US dollar has fallen by more than 12% (DXY index), with speculative positioning stretched by the end of 2020. 

If this USD losing streak comes to an end soon, the gold price may pullback in the short-term, though for Australian dollar investors it would likely be less of an issue as the AUD would also be under pressure in these circumstances. 

Continued strength in equity markets could also be a short-term headwind, as it may reduce investor desire to hold portfolio hedges like gold.

Despite these risks, there are numerous tailwinds that could push gold higher including:

Rising inflation expectations

The US five year forward inflation expectation rate ended 2020 at 2.03%. That is higher than the end of 2019, and an increase of more than 1.10% since inflation expectations plunged during March 2020.  

Record low yields

By the end of 2020 only 15% of all global bond markets had a yield above 2%, with most government bonds already yielding less than inflation. 

Outlook for monetary policy: 

Central Banks have been clear that more monetary stimulus will be forthcoming in 2021 and beyond, with cash rates unlikely to move higher for years to come. 

Gold stands to benefit from this backdrop of already low to negative real yields and potentially higher inflation, especially given it has historically increased by approximately 20% per annum in AUD terms in years where real cash rates were 2% or lower, like they are today. 

The fallout from COVID-19 remains an X factor for gold, and indeed for financial markets as a whole. Whilst everyone hopes that we have seen the worst, and that 2021 marks the beginning of a ‘post COVID’ world, there are no guarantees. 

Mutations are beginning to develop, whilst meaningful parts of the global economy remain locked down. Even the best-case scenario, which would see a successful rollout of vaccines around the world, represents an enormous logistical (not to mention political) challenge, with global economic output unlikely to catch up to its pre COVID-19 trajectory for years. 

Markets are pricing in a best-case scenario right now. If the situation deteriorates, expect risk assets to suffer, policy makers to deploy even more stimulus, and safe haven assets like gold to catch a bid. 

The above tailwinds indicate that demand for gold, and therefore gold prices are likely to remain well supported as we move through 2021. 

Jordan Eliseo
Manager – Listed Products and Investment Research 
The Perth Mint
7 January 2021

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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Gold and silver correct as markets look to vaccine news

Topics [ gold market gold analysis silver market ]

Precious metal prices dropped sharply toward the end of November, with the USD price of gold falling by more than 6% across the month. This was spurred by investor optimism regarding the development of COVID-19 vaccines which helped drive global stock markets to all-time highs. 

What happened in precious metal markets in November?


• The gold price fell by more than 6% in USD terms in November, ending the month trading at USD 1,762.55/oz.  
• In AUD terms, gold dropped 11% to end the month below AUD 2,400/oz. A sharp rally in the value of the AUD contributed to the pullback.
• Silver also declined by 6% during November, with the gold silver ratio ending the month at 79.
• The precious metal pullback occurred despite weakness in the USD (-2.18%) and falling real bond yields, developments which are typically supportive of bullion prices. 
• Global equity markets rose by more than 13%, their strongest monthly gain ever, as optimism regarding COVID-19 vaccines drove risk-on appetites. 
• Cryptocurrency markets also roared higher in November, with Bitcoin rising by 40%, ending the month near all-time highs just below USD 20,000 per coin 
• Gold is now sitting at a much healthier level from a technical perspective after the recent pullback, with multiple tailwinds to support prices as we head toward 2021.

Full monthly review – November 2020 

Gold and silver prices fell by more than 6% during November, with the two metals ending the month trading at USD 1,762.6/oz and USD 22.20/oz respectively.

Since trading at their calendar year highs in August, which was also an all-time high in nominal terms for gold, the two metals have pulled back by 15% (gold) and 23% (silver). 

This has had an inevitable impact on demand, with flows into precious metal ETFs including Perth Mint Gold (ASX:PMGOLD) turning negative for the first time this year.

Since the US Presidential election, investors have well and truly embraced a risk-on position. Some see signs of a mania building, with warning signs including: 

• An almost record monthly increase in the MSCI All World Index, which rose by 13% in November.
• The S&P 500 price to sales ratio climbing to 2.69, 14% higher than its reading in 2000, and more than 200% above the lows seen during the depths of the GFC.
• The Dow Jones index climbing above 30,000 points for the first time ever.
• Huge inflows into equity markets, with analysis in the Financial Times suggesting more money flowed into equity market funds in the week following Pfizer announcing successful COVID-19 vaccine results than in any week in at least two decades.  
• The price of Bitcoin soaring approximately 40%, closing in on a new all-time high above USD 20,000 per coin. 
• CNN’s Fear and Greed index flipping from showing extreme fear a month ago to showing extreme greed. 
• A 13% increase the S&P Goldman Sachs commodity index as markets price in higher rates of growth as we head toward 2021. 

The primary cause of the optimism that has swept across investment markets in the past few weeks has been the positive news regarding the development of multiple COVID-19 vaccines. Barring any mishaps, these look set to roll-out in the weeks and months ahead. 

COVID-19 vaccines have not been the only factor though, with markets warming to reassurances from central bankers around the world who have promised not to take away the monetary punchbowl anytime soon, even if growth bounces back faster than expected.

Financial markets have also reacted positively to the news that ex-US Federal Reserve Chair Janet Yellen is soon to take over as US Treasury Secretary. This bodes well for what is shaping up as an inevitable merging of fiscal and monetary policy in the years ahead. 
 
Below, we delve into three areas of relevance to precious metals investors and explain why we remain optimistic about the outlook heading into 2021, especially after the much-needed correction gold and silver have been through these past few months. 

Real yields and the USD didn’t help gold this time

Some precious metal bulls will have been troubled by the fact that gold sold off aggressively during November, despite a fall in real yields and a decline in the USD. 

As per the table below, real yields fell by roughly 10 basis points across the maturity spectrum in November, with the decline driven by both a minor decrease in nominal bond yields themselves, as well as slight uptick in inflation expectations. 


Source: The Perth Mint, United States Treasury


Typically, one would expect gold to rise as real yields fall, as this reduces the opportunity cost of investing in the precious metal, but that did not happen during November. 

Alongside the decline in real yields, the USD index (DXY) fell by more than 2% in November. Many investors see gold as an anti-USD play. History does bear this out to a degree, though the relationship isn’t as simple as USD up, gold down, or USD down, gold up, as some would have you believe. 

This is demonstrated in the table below, which looks at monthly returns for the DXY and the USD spot gold price in environments where the DXY is rising and falling. 

Note that we have measured the relationship between gold and the DXY over three time periods, all ending in November 2020:

• From 1971 when the United States formally abandoned the gold standard;
• From the end of 1999 when the secular bull market in precious metals started; and 
• From the end of 2015 when the cyclical correction in gold, which saw the precious metal fall below USD 1,100/oz, came to an end. 

Table: Gold and the USD

Source: The Perth Mint, Reuters

The table is telling us that:

• The USD is as likely to rise as it is to fall in any given month, with the average move to the upside and downside quite similar. As an example, since 1999 DXY has risen in 123 months (+1.78% average gain) and fallen in 128 months (-1.74% average loss).
• Gold tends to prosper far more in falling USD environments than it suffers during rising USD environments. As an example, it has delivered average gains of +2.43% in months the USD has fallen since 2015, yet only suffered average declines of -0.50% in months that USD has risen. 
• While gold does tend to fall when the USD rises and increase in value when the USD falls, it doesn’t always behave in this manner. For example, from 1971 onward, gold has increased 66% of the time the USD falls, meaning there is a more than three in 10 chance gold will fall in months that the USD falls. 

This is exactly what transpired in November 2020. 

Optimism regarding COVID-19 vaccines and the record rally in risk assets which pushed global stock markets to all-time highs combined to push gold lower, even though the USD and real yields were falling. 

Gold to silver ratio – the big picture


Silver is often seen as a high-beta version of gold, outperforming to the upside and underperforming to the downside. It also displays significantly higher price volatility, owing to its quasi-monetary, quasi-industrial metal status.

In April 2020, the gold to silver ratio (GSR) peaked just above 110, meaning one ounce of gold could buy 110 ounces of silver. By August, the GSR had fallen to 71,  when gold was hitting all-time highs, before rising back toward 80 by the end of September. 

Despite the sell-off in precious metals in the two months since, the GSR has essentially remained static, ending November just below 80. 

For precious metal bulls, the fact that silver has held its ground relative to gold over this period, and during November in particular, is an encouraging sign that precious metals are approaching the end of the corrective cycle that began in mid-August. 

A look at the GSR over a longer term also tells an important story when it comes to precious metals, and developments in the economy and financial markets more broadly. 

The chart below highlights movements in the GSR, as well as the USD spot gold price since December 1999.

Chart: Gold to silver ratio and USD spot price of gold


Source: The Perth Mint, Reuters

While gold has risen from under USD 300/oz to over USD 1750/oz during this period, the GSR has moved in a wide range. It ended 1999 sitting at 53, hit a low of 33 in April 2011, and then peaked above 110 earlier this year.

The table below highlights the gold and silver price, as well as the GSR at some of the key points over the past two decades. 

Table: Gold and silver prices plus GSR

Source: The Perth Mint, Reuters

The above chart and table, which highlight the nine years of silver price underperformance relative to gold leading into April 2020, also neatly captures four of the primary economic and financial market trends that have dominated the post-GFC era. 

These include the bear market in commodities, the record outperformance of financial assets vs hard assets, low rates of economic growth in the developed world and minimal inflation levels as measured by increases in CPI.

Any one of those developments would be expected to hold back the performance of precious metals, especially silver. The fact that all four were at play, and so persistently for most of the past decade, explains the extreme underperformance of silver relative to gold. 

Looking forward, the chart also makes it apparent that silver looks set to outperform gold, with markets beginning to price in expectations of higher economic growth and inflation.

Should that come to fruition, it will likely be supportive of the entire precious metals complex.

Textbook correction over as market looks toward 2021?


Another positive sign for the precious metal market is the unwind of speculative froth that had been building as gold roared above USD 2,050/oz in early August 2020. 

Back then, investors were piling into gold ETFs at a record pace and media coverage was overwhelmingly bullish, with some analysts issuing price targets of USD 3,000/oz and above.

As prices have fallen, the mood of the market has become far more subdued, while investors have begun lightening their gold exposure. Long positions in the gold futures market, for example, are now 25% lower than they were in late July.

We also saw outflows from gold ETFs in November (the first month in 2020 that total holdings declined), while technical readings like RSI had fallen into oversold territory by the end of last month. 

Importantly, the correction that we have seen in the gold price since the highs in August has brought the precious metal all the way back to its 200-day moving average (200DMA). 

This is something we had suggested may occur based on historic market patterns. The past 20 years of market data made it clear that every time the gold price had risen so fast that it was trading at 20% or more above its 200DMA, as it was in August, a correction soon followed.

Those corrections on average typically saw the gold price fall by 10% or more over a period of a few months, often trending back to, or just below, its 200DMA.  

The chart below, which tracks data to the end of November, illustrates this. It displays the USD spot price of gold as well as how far the gold price was trading above or below its 200DMA on any given day.

Chart: USD spot price of gold and deviation from 200DMA

Source: The Perth Mint, Reuters

Based on this data, and the market patterns it highlights, we can say that the 15% pullback that we have seen in the USD gold price since August so far represents a textbook correction that has played out perfectly from a technical perspective. 

This is not to say definitively that the lows seen in late November will mark the bottom of this corrective cycle for gold. Nevertheless, it is reasonable to observe that at this stage there is nothing in the charts or recent price action that suggests the primary bull market uptrend is over. 

With the market now sitting at a much healthier level, and with the recent investor overexuberance gone, now would appear to mark a safer entry point for medium to long-term investors looking to initiate or add to their precious metal positions. 

With monetary and fiscal policy likely to remain loose for years to come, and financial markets at or near record highs, there are no shortage of tailwinds for gold and silver as we head towards 2021. 

This will likely prove especially true if there any further COVID-19 flare ups or hiccups in rolling out vaccines.

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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Measuring global gold market liquidity

Topics [ gold investing ]

Liquidity measures the dollar value of turnover in a given asset class. It is an important consideration for investors seeking exposure to precious metals – and indeed any asset class.

All other things being equal, an asset that has high liquidity is better than one with lower liquidity, for two related reasons. 

The first is that an asset with higher liquidity is easier to buy and sell than one with low liquidity. 

Secondly, an asset with high liquidity may be traded with a minimal impact on the price, relative to an asset with low liquidity.

Many people are surprised to learn that physical gold is one of the most liquid asset classes in the market, with average daily turnover in 2019 of more than USD 145 billion. 

This is demonstrated in the chart below, which plots the dollar value of turnover in gold alongside a range of other assets. Note that the asset classes are colour coded depending on whether they are equity (red), fixed income (black) or currency (green) markets.

Daily liquidity (USD billion) in 2019 – Various asset classes


Source: The Perth Mint, World Gold Council

With daily liquidity matching the S&P 500, the world’s premier equity market, gold has a much higher liquidity than many major currency pairs and indeed many bond markets.

Where is gold traded? 

Liquidity in the gold market stems from two primary sources. Over the counter (OTC) bullion trading, as well as trading that takes place on futures markets, accounts for more than 85% of gold market turnover. 

The remainder comes from a range of other sources, including turnover on the Shanghai Gold Exchange, the London Metal Exchange and the global gold ETF market, which includes products like Perth Mint Gold (ASX:PMGOLD).

The table below provides a detailed breakdown of average daily turnover from these sources across the 2019 financial year. 


Source: The Perth Mint, World Gold Council

Takeaway for investors

A key benefit of gold, as one of the most liquid asset classes in the world, is that it gives investors peace of mind knowing they can sell when they need (or want) to sell.  

Provided an investor has bought gold from a reputable counterparty like The Perth Mint, and is storing it with that counterparty, then they should find it easy to liquidate their holdings at any point in the future. 

References

Trading volumes, World Gold Council. Accessed 27/10/20




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