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Will silver deliver strong gains for investors in 2020?

Topics [ silver investing ]

Precious metals are back on the investment radar in 2020, with the price of gold rising by over 12% in AUD terms and 4.5% in USD terms in the first two months of the year.

The strong performance continues a period of substantial price growth that dates back to Q4 2018, when a sharp decline in equity markets helped kickstart the rally in gold. Since then, the price of gold has increased by 48% in AUD terms and 33% in USD terms, with investment demand soaring.

Evidence of this can be seen in a Bloomberg news story from 26 February 2020, titled “Gold -Backed ETFs have never seen a run of inflows like this”, that highlights the fact that gold ETFs had seen net inflows for 25 days in a row, with total holdings at all-time highs.

Whilst it is true that gold has been a stellar performer of late, it is not the only precious metal achieving solid results. Silver has also delivered strong gains for investors, with the price rising by 29% in AUD terms and 16% in USD terms between Q4 2018 and the end of February 2020.

Crucially, just like gold, silver has substantially outperformed the broader commodities market over this time period. This is evidenced in the chart below, which plots the returns of gold, silver, oil and copper, as well as the ASX 200 from end September 2018 through to end February 2020.

Source: The Perth Mint, Market Index, London Metals Exchange, oilprice.com

The chart highlights the strong outperformance of gold and silver, with both rallying in Q4 2018, a period in which the ASX 200 and other commodities sold off.  This demonstrates that both gold and silver have monetary safe haven qualities, unlike most commodities, which historically sell off during periods of equity market weakness and/or heightened concerns regarding the health of the global economy.

Strong demand for Perth Mint silver

The increase in the silver price has helped drive a notable increase in investment demand for Perth Mint products.

Since September 2018, sales of silver minted products have averaged almost 1 million ounces per month, which is a 28% increase relative to the average demand seen in the prior six years.

Demand for silver expected to rise

According to The Silver Institute update in early February 2020, “macroeconomic and geopolitical conditions will remain broadly supportive for precious metals, encouraging investors to stay net buyers of silver overall.”

Drilling down into certain sectors of the market, The Silver Institute expects:

 • Holdings in silver exchange-traded products (ETPs) to remain elevated in 2020. Profit-taking in ETPs is likely to be limited, even with a price rally.

 • Silver physical investment, which consists of purchases of silver bullion coins and bars, is forecast to increase for the third year in a row, up by around 7 percent in 2020.

Price wise, The Silver Institute is bullish with their forecast suggesting the USD silver price would average USD 18.40 this year, an increase of over 13% relative to last year. The expected price rise (much of which we’ve already seen in January and February) “is premised mainly on a positive spill-over from gains in gold, as the yellow metal will continue to benefit from macroeconomic and geopolitical uncertainties across critical economies. Concerns about the state of the global economy will have possible negative consequences for the industrial metals, and by extension, silver. However, the weight of institutional money flowing into a relatively small market should prove sufficient for silver to outperform gold.”[1]

Is silver set to outperform?

Whilst there are no guarantees that silver will outperform gold in 2020 and beyond, it is not uncommon for this to happen, especially in strong precious metal bull markets where the prices of both gold and silver rise.

As an example, between October 2008 and August 2011, the price of gold rose from USD 723 to USD 1823 per troy ounce, an increase of just over 150%. In that same time period, the price of silver rose from USD 9.81 to USD 41.47 per troy ounce, an increase of over 320%.

The gold to silver (GSR) ratio, which measures how many troy ounces of silver you need to buy for one troy ounce of gold, fell from 74 to 44 between October 2008 and August 2011, highlighting silver’s outperformance.

As at the end of February 2020, the GSR is sitting just above 95, with movements in this ratio from the end of 1999 through to today seen in the gold line on the chart below. The grey line represents the average GSR over time.

Source: The Perth Mint, Reuters

The chart makes it clear that the current GSR is the highest it has been in the past twenty years, indicating that over this time period, silver has never been this cheap relative to gold.

Assuming the gold price continued to trade at USD 1,600 per troy ounce (where it is at the time of writing), silver would need to rise to just under USD 25 per troy ounce for the GSR to revert to its average of the last 20 years, which is 65. That would be an almost 50% rally in the silver price, relative to where it is trading today.

For longer-term investors who can live with the greater price volatility that silver displays, the near all-time highs in the GSR are a notable development, highlighting the return potential that silver may offer 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.

[1] Global Silver Market Forecast To Shine in 2020, The Silver Institute, 02.12.2020



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Why is gold the best portfolio hedge when equities fall?

Topics [ gold analysis ]


It has been a strong start to 2020 for gold, with the yellow metal rising by 12.99% in AUD terms, and 4.54% in USD terms in the first two months of the year. The increase in the price has seen an uptick in investment demand, as well as a surge in enquiries across our entire business from potential investors looking to find out information about the gold market.

There has also been a surge in enquiries from potential investors, with many looking for information on how gold has typically performed during periods of equity market weakness.

With fears over Coronavirus and a deteriorating global economy continuing to build, there appears to be growing concern that the more than 10% fall on the ASX in late February may usher in a period of higher volatility, and lower returns for equity market investors.

If that were to happen, then history would suggest that gold is likely to perform well, as it has recently, with the yellow metal having an unmatched track record of strong performance whenever equities have fallen hardest.

This is best seen in the chart below, which plots the returns for gold and for equities in the worst five calendar years for Australian equity markets between 1971 and 2019.

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. The figures amount to a performance differential of almost 65%, with gold delivering an average increase of almost 40%, whilst the sharemarket saw average falls of almost 25%.

Not only did gold perform well in absolute terms in these environments, but in relative terms as well, with a study from The Perth Mint based on data from 1971 to the end of 2019 highlighting the fact that the yellow metal outperformed bonds and cash during periods of heightened equity market weakness.

Gold’s diversification qualities, and the way that it can help protect a portfolio during periods of equity market volatility are relevant at all times, but particularly today, given the ongoing risks in equity markets.

What are the risks?

The economic and geopolitical risk factors facing equity markets in 2020 and beyond are well established. Debt to GDP levels are higher than when the Global Financial Crisis (GFC) hit ten years ago, whilst interest rates are much lower, leaving less room for central banks to deploy conventional monetary policy tools to assist in the next downturn.

Beyond those factors are the warning signs in the equity market itself, including:

 • Markets are near all-time highs, having gone through one of the longest bull runs on record.

Despite the recent volatility, equity markets like the S&P 500 are trading near their all-time highs, with a decade long bull market that some analysts are claiming is the longest on record.

Locally, the ASX pushed through the 7,000-point barrier in January, whilst the accumulation index has increased by approximately 85% from its 2007 high, and 245% from its GFC low.

These are superb returns, but they belong to the past.

 • Price to earnings ratio near record highs

A second warning sign for equity markets can be seen when looking at the S&P 500 cyclically adjusted price to earnings ratio (CAPE), with investors currently paying just over 34 times earnings to be owners of stock. This is a substantial increase, as during the worst of the GFC, the CAPE ratio dropped to just 15.

This can be seen in the chart below, which plots the CAPE ratio from 1900 onward. As the chart makes clear, the current CAPE reading has only been exceeded twice in the last 120 years.

Source: The Perth Mint, Robert Shiller Online Data

The first of those was back in 1929 when CAPE hit 39, whilst in 1999 the ratio hit 48. Suffice to say that investors who bought into US equities at those levels were not well rewarded in the decade that followed. Will this time be different?

As a brief aside, whilst it might be accurate to say there is little consumer price inflation in the world today, the rise in CAPE (seen in the above chart) highlights substantial asset price inflation in the ‘post’ GFC environment. The price investors have to pay to be an owner of stock, as measured by CAPE, has increased by more than 11.5% per annum over the last 11 years.

 • Price to sales ratio at all-time highs

A further warning sign for equities is the price to sales ratio for the S&P 500, which is calculated by dividing the share price of a company (or the market as a whole) by the dollar value of the sales a company generates.

As an example, if a fast food company was trading at $100 per share, and they generated $100 of hamburger sales in a year, then the price to sales ratio would be 1:1.

The chart below plots the price to sales ratio for the S&P 500 as a whole, rather than an individual company, over the last twenty years, with this reading recently hitting an all-time high of 2.40. During the GFC, as the chart highlights, the ratio dropped to just 0.8.

Source: The Perth Mint, multpl.com

Using our fast food company analogy again, back in 2009 sharemarket investors needed to spend $80 to buy $100 worth of hamburger sales. Today those same $100 worth of hamburger sales cost investors $240.

That’s an inflation rate of approximately 18% per annum over the last 11 years.

 • The rise of zombie companies

In 2018, the Bank for International Settlements (BIS) released a report looking at the rise of ‘zombie’ companies that are listed on global equity markets.  Zombie companies are in effect organisations whose profits can’t meet their current debt servicing costs.

Logic would suggest that in the ultra-low interest rate environment we have been in over the last decade, there would be very few companies in this predicament. In reality, the opposite is true, with the BIS paper (which looked at 14 advanced economies) suggesting 14% of firms were zombies by the end of 2016, up from just 2% in the late 1980s.

This is not just a northern hemisphere phenomenon, with research from Coolabah Capital looking at the Australian market finding that up to 17% of companies listed on the ASX were zombies by the end of 2018, up from just 10.8% in 2010.

Whilst low rates will continue to help keep these companies afloat, one struggles to see how they can meaningfully lift investment given the apparent fragility in their financial circumstances.

Over the long-run one can expect this to depress economic growth rates, with the BIS themselves stating that; “Zombie firms are less productive and crowd out investment in and employment at more productive firms.”

Summary

Whilst none of the above factors guarantee that a stock-market crash is imminent, or even that equity markets will perform poorly in years to come, they do suggest caution is warranted, especially given the ongoing economic risks and geopolitical tensions.

Astute investors pay attention to the warning signs financial markets give off, and right now those warning signs are significant.

Combine these risks with the low to negative real yields available in traditional defensive assets like cash and bonds, and the strategic case for including gold in an investment portfolio today remains compelling.

Disclaimer

Past performance does not guarantee future results.

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



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Does gold perform stronger at certain times of the year?

Topics [ gold analysis ]

It has been a strong start to 2020 for gold, with the yellow metal rising by 12.99% in AUD terms, and 4.54% in USD terms in the first two months of the year. The increase in the gold price has seen an uptick in investment demand and queries from potential investors looking to find out information about the gold market.

Investors often ask the question about seasonality, and whether or not there are certain periods of the year where gold historically performs strongly, and other periods where its performance is more subdued. The chart below helps answer this question, highlighting the average monthly percentage return for gold priced in USD. The chart is based on analysis of gold price return data from the beginning of 1971 through to the end of January 2020.

The figures you can see in the chart are calculated by taking the sum total of the returns seen in each month, and dividing it by the total number of months. For example, if the total return of gold in every January between 1971 and 2020 added up to 100%, then the average monthly return for January would be 2%, as there have been 50 Januaries over that timeframe.

Source: The Perth Mint, Reuters

The chart identifies that returns for gold priced in USD have typically been strongest from November through to end February, with three of the best four months of the year falling in that period.

The chart also highlights the fact that historically gold has delivered positive returns in 11 months of the year (though June and October are basically flat), with March the only month of the year that has historically seen gold prices decline.

Whilst seasonality data is interesting to analyse, it is not an indicator that many people use as a driver of their investment decisions. There are multiple factors that can move the gold price in any given day, week or month, with no guarantee that average monthly returns will be repeated going forward.

It is also worth noting that there is volatility between the average, best and worst numbers seen in any given month. January for example, which on average has been the best month, once saw a gold price decline of -13.57%. March, which on average has been the worst performing month, once saw a gold price rise of over 14%.

Given these factors, there is risk for investors who try to time the gold market based on seasonality data alone. Long-term focused investors will instead prefer to work out what percentage of their portfolio they wish to allocate to gold (and other precious metals), and move that percentage up or down based on their own financial circumstances, as well as developments in the economy and financial markets.

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 hits all-time high in Australian dollars

Topics [ gold analysis Market update ]

Executive summary

 • The Australian dollar gold price hit an all-time high in February, rising 2.76% to finish the month at AUD 2441 per troy ounce. Prices in US dollars ended the month essentially flat, after trading above USD 1,650 per troy ounce during the month.

 • Silver underperformed, down 7% in USD terms, with the Gold to Silver ratio (GSR) finishing the month above 95, the highest figure in approximately 30 years.

 • Financial markets were driven by growing fears over the spread of Coronavirus in February, which has now spread to over 50 countries worldwide.

 • Global equity markets suffered large falls as the Coronavirus crisis intensified. This included the Australian Stock Market, which in the last week of February suffered its largest weekly fall since October 2008. 

 • Precious metals were not the only safe haven assets to see increased demand, with US and Australian 10-year bond yields hitting all-time lows in February 2020.

 • Gold ETF holdings soared to all-time highs during February, whilst the value of precious metal holdings held by The Perth Mint depository exceeded AUD 5 billion, a new record.

The month in review – February 2020

February was one of the most volatile months in a decade for financial markets, with large moves seen in equities, commodities, fixed income assets and precious metals. The driver of these moves was the increasing fear that markets have about the spread of the coronavirus around the globe.

Far from being contained, large numbers of confirmed cases showed up in all parts of the world, from Korea to Italy to Iran, with the disease seemingly spreading faster outside of China than within it.

Countries stepped up their preparations to deal with any fallout from a further spread of the virus, with Australia initiating its emergency response plan, meanwhile the World Health Organisation said the outbreak had reached a “decisive point” with Coronavirus having “pandemic potential.”

Given these developments, the volatility seen in financial markets was to be expected, with precious metals benefiting from the fear gripping markets. At one point during February gold traded above USD 1,650 and AUD 2,500 per troy ounce, a new all-time high in Australian dollar terms.

The gains were not maintained however, with the metals suffering large losses on Friday 28th. Gold fell by approximately 4% on the day to end the month flat in USD terms, whilst silver fell by close to 8%, as some investors locked in the profits, whilst others were forced to liquidate their precious metal holdings to cover losses in other parts of their portfolios. 

Despite the sharp correction to close out the month, it has still been a strong start to 2020 for gold, with the yellow metal rising by 12.99% in AUD terms, and 4.54% in USD terms in the first two months of the year. Silver has now fallen by almost 7% in USD terms, with the Gold to Silver Ratio (GSR) finishing February 2020 at 95, the highest level seen in the last 20 years.

Fixed income securities found favour during February. Australian and US 10-year government bonds ended the month yielding just 0.68% and 1.15%. In percentage terms, the declines in the yields on these securities were amongst the largest on record, with both falling to all-time lows.

The news was not so positive for share markets, which suffered one of their worst months on record. According to Deutsche Bank, the 10% fall in US equities that occurred in just six trading days in late February was the fastest on record. European stocks also fell sharply, according to Commsec, whilst the last week of February saw the ASX 200 suffer its biggest weekly fall since October 2008.

Many share markets around the world have now erased all their gains seen in the first few weeks of 2020, with the ASX 200 for example now trading back at levels seen in June of last year.

ETF holdings saw record inflows

The strength in the gold price for most of February, and the deteriorating economic and financial market outlook saw a flood of investor demand, with gold ETFs seeing net inflows for 25 days straight in February. This is the longest run on record, with total holdings in global gold ETFs hitting all-time highs.

The Perth Mint saw the strength of this rising gold ETF demand first hand, with holdings in our ASX listed product Perth Mint Gold (ASX: PMGOLD) increasing by over 12% in 2020 thus far. This growth helped total client holdings of precious metals stored with The Perth Mint top AUD 5.1 billion for the first time, testament to the growing interest in precious metals from investors both in Australia and worldwide.

Precious metals outperformed commodities

Market movements in February saw the gap between precious metals and other commodities increase, with the disparity in their performance dating back to late 2018, when a correction in equity markets reignited demand for precious metals.

This is demonstrated in the chart below which plots the return for gold, silver, copper and crude oil, as well as the ASX 200, from September 2018 through to February 2020. Note that all the assets were rebased to 100 for ease of comparison.

The chart highlights the strong outperformance of gold and silver, with both rallying in Q4 2018, a period in which the ASX 200 and other commodities sold off.  This demonstrates that both gold and silver have monetary safe haven qualities, unlike most commodities, which historically sell off during periods of equity market weakness and/or heightened concerns regarding the health of the global economy.

In USD terms, from September 2018 to February 2020, gold and silver rose by 32.33% and 16.62% respectively, while copper and oil dropped by 7.05% and 36.11% respectively. The ASX 200 price index was up just 3.76% over this time period.

The outlook

The pullback in gold and silver on February 28 was in many ways a healthy development for the precious metal market. We have warned for some time that gold needed to consolidate recent gains, especially given the size of the price move that we have seen since September 2018.

No market goes up in a straight line, so it was only a matter of when, not if, a correction in precious metal prices occurred, especially as hedge funds and other short-term speculators had built up historically large long gold positions.

Whilst Friday’s pullback took some froth out of the market, caution is still warranted. If equity markets continue to sell off, then gold and silver may also decline, even if only on a short-term basis, much like they did for parts of 2008, before they embarked on a massive bull market run that culminated in 2011. 

Short-term moves aside, developments in financial markets and in the economy throughout February don’t in any way alter the long-term bullish argument for precious metals, nor the strategic case for investing in them as part of a well-diversified portfolio.

If anything, quite the opposite, for whilst the fallout from Coronavirus remains impossible to quantify, there is no doubt that it will have a negative impact on economic growth, and act as a headwind for equity markets, with Goldman Sachs now forecasting that there will be no earnings growth for S&P 500 companies as a whole.

Given the elevated price to sales and price to earnings ratios that investors are currently paying to own stocks, a period of subpar returns in share markets is impossible to ignore, even if they bounce back from the severe losses seen over the last week of February.

Added to this is the outlook for real yields in traditional defensive assets like cash and fixed income. At current inflation rates, many government bonds guarantee negative real returns to buy and hold investors, encouraging them to diversify into alternative assets, including precious metals.

Meanwhile, markets are now pricing aggressive monetary easing from central banks, with Goldman Sachs forecasting that the US Federal Reserve will cut interest rates by 1% this year, starting with a 0.5% cut this month.  In Australia, the Reserve Bank of Australia (RBA) acted in early March, to reduce interest rates to a new all-time low of just 0.5%.

Given this backdrop, it is no surprise that many banks remain bullish on gold, with Invesco recently stating that they see gold hitting USD 1,800 per troy ounce, whilst precious metals focused asset manager Spott Inc CEO Peter Grosskopf, thinks the yellow metal is on track to hit USD 2,000 per troy ounce.

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 rallies strongly to start 2020 on a high

Summary

 • Precious metals have begun 2020 in a strong position, with gold up 4.80% in USD terms and almost 10% in AUD terms.

 • The assassination of Iranian military general Qassem Soleimaini, as well as fears over the spread of coronavirus are helping drive demand for safe haven assets, with bonds and the US dollar also rising. 

 • End of year demand figures for 2019 show near record levels of gold demand from ETF investors and central banks.

 • Outlook for gold demand remains positive, with the global economy and financial markets facing several headwinds

Full monthly review – January 2020 

Precious metal prices continued their rally in January 2020, with the price of gold and silver in USD rising by 4.80% and 1.13% respectively. Australian dollar investors saw even higher returns, driven by an almost 5% decline in the local currency, with the AUD gold price up by almost 10% for the month, comfortably topping AUD 2,300 per troy ounce by the end of January. 

The rally in precious metals was driven by two key events in January. The first of these was the assassination of Iranian military general Qassem Soleimaini, which has investors rightly worried about elevated geopolitical tension in the Middle East.  The second was the discovery and spread of the coronavirus from Wuhan in China, with fears the virus may develop into a global pandemic building by the day. 

Precious metals were not the only safe haven assets that benefited, with the US dollar also rising, whilst government bonds have seen strong demand, with yields plunging (and prices rising) throughout January. 

In the United States 10-year government bond yields fell by 20% for the month, whilst in Australia, 10-year government bond yields fell by 30% during January 2020, the largest monthly decline in percentage terms since the turn of the century. 

Given the demand for safe haven assets, many would have expected share markets to tumble, but this did not transpire. Globally, the MSCI All World and S&P 500 indexes were essentially flat, whilst in Australia, the ASX 200 index reclaimed the 7,000-point mark, increasing by almost 5% for the month. 

This stronger than expected performance from equity markets owes little to improvements in global economic data, with the JP Morgan Global Manufacturing PMI for January 2020 showing only the slightest of expansions in economic activity.

Instead it is largely due to optimism over the US-China trade deal, whilst expectations of continued monetary support from central banks (despite the Fed keeping rates unchanged at their meeting in January) and negative real yields on trillions of dollars of bonds across the developed world continue to provide support for risk assets. 

Gold ETF flows 

Gold ETF holdings hit all-time highs in 2019, as investors in North America and Europe increased their exposure to the precious metal. In total, holdings in global gold ETFs grew by 14% in terms of total tonnes of gold backing the products, whilst the market value of the products increased by almost 40%, owing to the strong rally in the gold price last year. 

The chart below shows annual flows into gold ETFs from 2004 to 2019 inclusive, alongside the price of gold in USD per troy ounce. 


Source: The Perth Mint, World Gold Council


The chart highlights the fact that global gold ETFs saw inflows of over 400 tonnes in 2019, a calendar year figure that has been exceeded only twice in the last 15 years. 

The first of those was in 2009, during the height of the Global Financial Crisis (GFC), when central banks including the US Federal Reserve began quantitative easing programs. The second time was 2016, when Brexit and the election of Donald Trump saw demand for gold ETFs soar. 

If history repeats, then gold investors should be relatively optimistic regarding the potential for gold to perform well in the year after such strong inflows into gold ETFs are seen, with gold in USD rising by 28% in 2010, and 12% in 2017. 

Central bank demand near record highs


Central banks notched up their 10th consecutive year of net gold purchases, with demand in 2019 again topping 650 tonnes. This level of demand has only been surpassed once in the last 50 years (in 2018) with the chart below highlighting central bank purchases on a calendar year basis since 2010.

Central bank gold purchases 2010 to 2019
Source: The Perth Mint, World Gold Council

Over the past decade, central banks have recorded average annual purchases of just over 500 tonnes. This represents a remarkable shift in behaviour that coincides with the onset of the GFC, as central banks averaged net sales of 443 tonnes per year in the decade to end 2009. 

Whilst this buying from central banks arguably has minimal impact on the price of gold on a day to day basis, it is profoundly important medium to long-term driver. It also provides strong evidence of gold’s enduring role as a unique monetary asset. 

Jewellery and bar and coin demand soft

Weakness in demand for gold jewellery, as well as a decline in the demand for physical gold bars and coins offset the strong demand seen from ETF investors and central banks. Investors and consumers bought 2,978 tonnes of physical gold in jewellery, bar and coin format in 2019, a reduction of over 10%, or just over 355 tonnes, relative to the demand for these products seen in 2018. 

Falling demand was driven by declines in China and India, with rising inflation, record high gold prices and deteriorating economic conditions driven by trade disputes all playing a part, with the market for bars and coins hitting a ten-year low. 

Despite the subdued demand from this part of the market, it is worth pointing out that the almost 3,000 tonnes of gold bought in jewellery, bar and coin form throughout 2019 still accounted for over 85% of gold mining production, which came in at 3,463.7 tonnes for the year. 

Outlook

The pullback in the gold price seen in the first few trading days of February is a reminder of the short-term risks facing precious metal investors, especially given the yellow metal had rallied over 30% in USD terms between September 2018 and end January 2020. 

Short-term volatility aside, the fundamentals remain strong, with many tailwinds supporting gold demand and therefore prices in the period ahead. The low yield environment and elevated geopolitical concerns are likely to support central bank and gold ETF demand, even if investment levels fall short of the near record numbers seen in 2019. 

Financial market uncertainty will also help drive gold allocations, as investors seek to hedge against any potential falls in equity markets. This would seem prudent, not only because equity markets remain at or near all-time highs in parts of the developed world, but also because global price-earnings ratios are at elevated levels, whilst expectations for earnings growth are declining.

These risks and the desire for investors to hedge against them by owning gold as part of their portfolio will only be exacerbated if concerns about the coronavirus continue to build, with China now accounting for close to 16% of global GDP, versus closer to 4% when the SARS virus hit back in 2003. 

The economic threat from coronavirus may be particularly acute in Australia, given our reliance on Chinese demand for commodity exports, as well as our education sector, with the number of Chinese students in Australia more than quintupling since 2002. 

Australia’s tourism industry, already reeling from the bushfire crisis, will also be severely impacted from travel restrictions in place, with these factors contributing to a nine-year low in business confidence, according to a January 2020 survey from Roy Morgan. 

Given these challenges, it is no surprise that an end January 2020 Bloomberg survey on the outlook for Australian interest rates saw the majority of respondents forecast that the RBA will cut the cash rate to just 0.25% by the end of the year. 

Some economists, including Dr Shane Oliver from AMP Capital, are also warning that the Australian economy may already be in recession, with ANZ forecasting a decline in economic output in Q1 2020. 

In due course, the challenges facing the domestic economy can be expected to exert downside pressure on the value of the AUD, boosting the returns that Australian investors may earn from investing in precious metals. 

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

World Gold Council – Gold Demand Trends
https://www.gold.org/goldhub/research/gold-demand-trends/gold-demand-trends-full-year-2019

JPM Morgan Manufacturing Data
https://www.markiteconomics.com/Public/Home/PressRelease/8484b7934c3a4cdaa0296c176c51b21d

Importance of China Economy – SARS v Corona
https://www.cnbc.com/2020/02/05/coronavirus-how-china-economy-has-changed-since-sars.html

Number of Chinese students in Australia
https://www.theaustralian.com.au/commentary/universities-have-put-an-awful-lot-of-eggs-in-their-chinese-baskets/news-story/5fc0df9dcb092acb4beaad5b07666fbb

Shane Oliver warning on recession
https://www.abc.net.au/news/2020-02-05/rba-lowe-sees-coronavirus-and-bushfire-economic-speedbumps/11931822?pfmredir=sm

Roy Morgan Business Confidence
http://www.roymorgan.com/findings/8271-roy-morgan-business-confidence-january-2020-202002030554



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Gold has been a strong performer when real cash rates are low

In today’s low cash rate environment one of the most topical issues for many investors is what to do with their cash holdings.

The income being earned on this cash is at record lows, with the Reserve Bank of Australia (RBA) cutting interest rates three times last year, ending 2019 at an all-time low of just 0.75%.

Given the latest set of Australian inflation data to end 2019 suggests prices across the nation are rising at 1.80% per annum (price rises for essential items like healthcare and utilities have increased by 4.40% and 5.40% per annum over the last decade), much of the money sitting in cash is losing value in real terms.

The question for investors about what to do with the cash in their portfolio will only be exacerbated if the RBA meets current market expectations and cuts rates to just 0.50% at some point in 2020.

In this environment gold is an asset investors should consider, with almost 50 years of market history telling us the precious metal has typically delivered strong returns when real rates have been low.

In Australia between 1971 and 2019 there have been 27 years when real cash rates were 2% or higher and 22 years when they were 2% or lower. The table below highlights the returns on cash and gold, in both nominal and real terms, during these periods.

Real cash rate environments and asset returns (%) – 1971 to 2019

The data tells us that when real cash rates are above 2%, gold recorded an average annual increase in nominal terms of 4.32%, with the yellow metal essentially flat in real terms.

However, in years when the real cash rate was below 2%, the price of gold rose by an average of more than 20% in nominal terms and by over 14% in real terms, with a calendar year increase seen in 19 of those 22 years.


Real cash rates are calculated by subtracting the official inflation figure from the RBA cash rate. As an example, if the RBA cash rate was 8%, and annual inflation was 5%, then the real cash rate would be 3%. If the RBA cash rate was 2% and annual inflation 3%, the real cash rate would be -1%. 


This information tells us that the increase in the gold price of just over 18% in 2019 was entirely in line with historical patterns, essentially matching the average annual return the yellow metal has delivered in low to negative real cash rate environments.

Gold has not only performed strongly in absolute terms when real cash rates have been low, but on a relative basis as well, outperforming both stocks and bonds during the years when real cash rates were below 2%.

This can be seen in the chart below, which plots the nominal and real returns for Australian stocks, bonds and gold during years when real cash rates were below 2%.

Australian asset class returns when real cash rates were below 2% - 1971 to 2019


In low cash rate environments,
no single easily accessible asset
has delivered higher returns than gold.

Two key drivers help explain why gold has delivered such strong absolute and market leading relative returns in low real rate environments.

1. Low or even negative real cash rates are typically only implemented as a form of monetary stimulus when the economy is weak or softening. In such environments it’s natural that investors adopt a more defensive approach by seeking out safe haven assets such as gold.

2. If the real rates one can earn from cash or short-term bonds are low, or even negative, then the opportunity cost of investing in gold is significantly reduced or completely eliminated.

These factors should be front of mind for investors trying to protect and build wealth today, as 10 to 15 year Australian government bonds currently yield less than 1.25% (as at end January 2020).

These yields suggest that the period of low to negative real returns on cash and cash-like investments such as term deposits, which gold has historically thrived in, may well continue for another decade or more.



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