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Gold ends 2019 up 19%


Summary

Gold and silver prices rallied strongly in the final month of 2019, up 3.63% and 4.76% respectively in USD terms.
For the full calendar year, gold rose 18.26% in USD terms and 18.86% in AUD terms, outperforming silver which was up 15.18% (USD) and 15.98% (AUD).
Gold price gains in 2019 were driven by multiple factors, including interest rate cuts in the US and Australia, declining bond yields globally and escalating geopolitical tensions.
Demand for precious metals was driven by record central bank purchases and inflows into gold ETFs hitting an all-time high in 2019. 
The gold price rise of the past 12 months is particularly impressive given the strength of global equity markets, with the US stock market up 29%, and the ASX up 18% in 2019. 
Outlook for 2020 is positive as multiple tailwinds support demand.

Full monthly review – December 2019

Gold finished 2019 on a positive note, rallying by more than 3.5% in December in US dollar (USD) terms. The rise was in part driven by USD weakness, with the dollar index falling by almost 2% last month. Over the course of the 2019, gold rose from USD 1,282.73 to USD 1,517.01 per troy ounce, an increase of 18.26%. 

In Australian dollar (AUD) terms, returns for gold in December were essentially flat, with the yellow metal rising by 18.86% for 2019 and marginally outperforming silver which increased by 15.98% across the course of the year.

Gold’s strong performance in 2019 represents a continuation of an uptrend that began in earnest at the start of Q4 2018 when the yellow metal was trading below USD 1,200 per troy ounce. Equity market volatility in the last three months of 2018 was a key driver of the gold rally that continued throughout 2019 even as equity markets themselves recovered strongly. 

Recession fears in the US, a meaningful decline in global bond yields, monetary easing from central banks and concerns over the US-China trade war combined to bolster demand for the precious metal pushing prices higher.

The rally in gold during 2019 was particularly impressive given how well the stock market performed, with the S&P 500 up by 28.88% last year and the ASX increasing by 18.38%. Many investors see gold as a safe-haven asset, even though market history indicates that it is often positively correlated to equity markets when those equity markets are rising strongly. 

This can be seen in the chart below, which highlights the annual returns of the ASX 200 and gold priced in AUD from 1993 to 2019 inclusive.

  

Source: Reuters, The Perth Mint

The ASX 200 recorded negative returns in seven of the 26 calendar years across this time period, with gold rising in six of those years. In the 20 years that the ASX 200 delivered positive returns, gold priced in AUD increased in 14. 

This includes last year which helps to highlight why gold may play a positive role in an investor’s portfolio in all market conditions and not only during periods of high inflation or equity market weakness. 

Demand for gold was also strong in 2019, particularly in the exchange-traded fund (ETF), private investor and central bank space. We explore this in detail below. 

Gold ETF buying strong – particularly in Australia

December 2019 capped on an impressive year for global gold ETF flows, with preliminary estimates from Reuters suggesting that holdings grew by more than 2.5% during the month. 

Across the year, holdings in global gold ETFs increased by 14%, with the total tonnes of gold held through these vehicles hitting 2,896 tonnes in October 2019. This represented a new all-time high, surpassing levels last seen in December 2012 when gold was trading closer to USD 1,664 per troy ounce.  

The Perth Mint has seen the growth in demand from ETF buyers firsthand, especially through the growth of our ASX-listed exchange-traded product, ticker code PMGOLD. Holdings in PMGOLD grew by more than 45% across the course of 2019, with inflows seen across 11 months a testament to the ongoing demand for gold we have seen from Australian investors. 

Private investor demand

Investor interest in gold hasn’t been confined to ETF inflows. Private holdings held in custodial storage have also seen significant growth. Research released by Goldman Sachs in late 2019 suggested that up to 1,200 tonnes of gold has been purchased and privately vaulted in countries like Switzerland and the UK across the past three years.

Central bank purchasing

Another key source of demand in 2019 came from central banks which have been net purchasers of gold for a decade now. By the end of Q3 2019, central bank demand had hit 574.5 tonnes for the year, with further acquisition taking place in Q4. 

Whilst the total amount of gold purchased by central banks for the entirety of 2019 is not yet known, current estimates suggest that it will be almost 670 tonnes. This would be a record for any given calendar year, surpassing levels seen in 2018 when just over 650 tonnes of gold were obtained by central banks. This number at the time represented the fastest pace of gold acquisition in five decades. 

Outlook for 2020 and beyond

Whilst short-term gyrations in the gold price are inevitable, we remain optimistic about the outlook for gold and precious metals generally as this decade gets underway with demand likely to be supported by several tailwinds. 

At a central bank level, whilst the rate at which banks acquire gold may ease from record levels seen across the past two years, there seems little question that they will remain net buyers. Geopolitical tensions and low-to-negative real yields are expected to continue to encourage reserve asset diversification into gold. 

Gold is also likely to find favour amongst institutional investors, with the recent Goldman Sachs research report noting that analysts: “still see upside in gold as late cycle concerns and heightened political uncertainty will likely support investment demand.” 

Importantly, Goldman also suggested that: “The case to reallocate a portion of normal bond exposure to gold is as strong as ever”. This is a theme we expect will support demand for gold for much of the decade to come, as in today’s environment, there is simply no real return, and in many cases guaranteed losses (if the assets are held to maturity) on many traditional safe-haven assets. 

This is demonstrated in the chart below, which shows yields on cash and a variety of fixed income investments (as at 30 November  2019) and compares them to average inflation rates of the past decade. 


 
Source: Bentham Asset Management, Livewire Markets, The Perth Mint, Australian Bureau of Statistics

Given a choice between negative real yields or the opportunity to gain from potential increases in the gold price, we believe it is only natural that an increasingly number of investors will choose the latter option by incorporating an allocation to gold in their portfolio, much like they did in 2019. 

This is just as likely in Australia as it is in other parts of the world, with multiple factors supporting gold demand locally including: 

Prolonged softness in the local economy 
The potential for further house price weakness in some parts of the country 
The likelihood that interest rates will be cut again this year 
Continued concerns about a potential decline in the value of the Australian dollar

These factors represent a compelling case for risk-conscious investors to consider gold as part of their portfolio as the asset’s safe-haven attributes come to the fore 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.

Articles referenced

Bloomberg article referencing Goldman Research
https://www.bloomberg.com/news/articles/2019-12-06/goldman-says-case-for-diversifying-into-gold-as-strong-as-ever

Zerohedge on Goldman Sachs Research
https://www.zerohedge.com/crypto/road-retirement-millennials-put-their-faith-bitcoin-goldman-says-go-gold

World Gold Council on Central Bank Demand
https://www.gold.org/goldhub/research/gold-demand-trends/gold-demand-trends-q3-2019/central-banks-and-other-institutions

Kitco on Central Bank Gold Demand
https://www.kitco.com/news/2019-12-04/Central-bank-gold-demand-has-surpassed-2018-s-50-year-record.html

Deccan Chronicle on Central Bank Gold Buying
https://www.deccanchronicle.com/business/in-other-news/020120/central-banks-gold-buy-highest-since-1970s.html


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Gold and superannuation

This short article addresses five key questions related to superannuation and investing in gold. It is a topic of growing interest given the already vast pool of superannuation money in Australia and how important superannuation is as a financial asset for most Australians. Employees are required by law to put 9.5% of their salary into a superannuation fund every year.   

Do Australian superfunds invest in gold?

Australian superfunds can and do have some gold exposure, though it is typically very minimal. June 2019 statistics from the Association of Superannuation Funds of Australia (ASFA) and the Australian Prudential Regulation Authority (APRA) suggest that only 2% of Australia’s superannuation monies are invested in ‘other’ assets, of which gold is just one. 

Whilst there is no exact figure, it is likely that less than 0.1% of all Australian superannuation assets are currently invested in gold. 

How has gold performed versus superannuation funds?

Since the turn of the century, the gold price has risen from under AUD 450 per ounce to more than AUD 2,000 per ounce, with an annualised return over the 20 years to end June 2019 of 8.48%. Across the same period, data from superannuation research consultancy Chant West states that the median ‘growth’ superannuation fund returned 6.8%.

Whilst gold has outperformed over this time period as a whole, there are years where superannuation funds outperformed gold. This can be seen in the following chart, which shows financial year returns from the 30 June 2000 to the 30 June 2019. 

Should I invest in gold using my superannuation?

The Perth Mint cannot provide financial or formal investment advice, including advice as to how people should manage their superannuation. Like all asset classes, there are risks to investing in gold and precious metals more generally. 

However, market history has demonstrated that gold in particular has a number of key attributes which make it attractive to investors, including:

• Strong long-term returns
• Historical outperformance in periods of low real interest rates
• Historical outperformance in periods of heightened equity market volatility
• High liquidity making it easy to buy and sell
• Zero credit risk

These attributes are helping drive investment demand for gold in Australia which includes Australians wishing to invest in gold via their superannuation. 

Can the Perth Mint help me invest in gold using superannuation?

The Perth Mint has a range of investment solutions, from our ASX-listed product (ticker code: PMGOLD) through to our online and offline depository accounts, which many investors use to access gold for their own Self-Managed Superfunds (SMSFs). 

It is best to contact your superannuation fund to discuss how gold fits into your current investment strategy and portfolio type.

Where can I find out more?


If you would like to find out more about investing in gold using superannuation, then you might like to read The Perth Mint’s report titled How precious metals can benefit SMSF trustees

Whilst the report is targeted toward Australians with a SMSF, it contains a host of useful information about why people may wish to invest in gold using their superannuation, frequently asked questions on investing in gold using superannuation, and details on Perth Mint products.

The report can be accessed here.

You can also email Perth Mint Depository at depository@perthmint.com or contact Senior Investment Manager Jordan Eliseo at jordan.eliseo@perthmint.com for more information.

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.


Sources
ASFA Statistics
https://www.superannuation.asn.au/ArticleDocuments/269/SuperStats-Aug2019.pdf.aspx?Embed=Y

Superannuation Returns 
https://www.chantwest.com.au/resources/super-funds-record-breaking-10th-straight-year



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All-time highs in equities drive November gold pull back

Summary

•      Gold remained range-bound, consolidating gains seen over the past 12 months, with the yellow metal still up by almost 20% in USD and 30% in AUD terms in the year to end November. 
•      Gold and silver prices corrected during the month, falling by 3.26% and 6.10% respectively in US dollar terms.
•      Returns for Australian dollar investors were also negative, with gold falling 1.23% and silver down 4.37% during the month. A 1.87% fall in the value of the AUD was responsible for the more limited decline. 
•      The drop in precious metals was driven by investor fear of missing out as stock markets in the United States hit all-time highs, US Treasury bond yields increased and risk hedges fell out of favour during the month. The largest ever short position on the volatility index (VIX) was  recorded in November.

Full monthly review – November 2019

Gold and silver prices eased as a sustained rally in US equity markets, an uptick in US Treasury bond yields and investor optimism surrounding a potential US-China trade deal weakened demand for precious metals. 

In US dollar terms, gold and silver fell 3.26% and 6.10% respectively, finishing the month at USD 1,463.90 and USD 17.02 per troy ounce. Across the past year gold in USD rose by 20%. With the gold to silver ratio essentially unchanged over this period, currently sitting at 86:1, silver too experienced a 20% increase across the 12 months to November. 

For Australian dollar investors a 1.87% decline in the local currency throughout November minimised the pull back. With gold and silver falling 1.23% and 4.37% respectively, the metals finished the month trading at AUD 2,166.98 and AUD 25.10 per troy ounce, still up 30% over the past 12 months. 

For now, gold remains largely range-bound, as it has since early October when it first drifted down towards the USD 1,450 per troy ounce. We expect the market to be supported at these levels, though the risk of a more significant correction cannot be ruled out. 

Very strong support is likely to be found near the 200-day moving average, which ended November sitting just above USD 1,400 per troy ounce. 

Investor outlook brightening as US equity markets rise

A key factor driving the pull back in gold was the continued strength seen in US equity markets, with the Dow Jones, the S&P 500 and the NASDAQ all hitting multiple all-time highs during November. 

Such is the strength of these markets that the S&P500 is on track to deliver one of its best calendar year returns in two decades. A basic 60/40 portfolio (60% equities, 40% bonds) looks like it will deliver its best annual return since 2009 according to a 29 November article on Bloomberg titled Records Set, Billions Minted: It Will Be Hard to Top 2019 Stocks

Investor outlook brightened notably during November with the Bank of America Merrill Lynch Global Fund Manager Survey seeing optimism toward global growth increasing at its fastest rate in 20 years.

Investors have also sold out of safe-haven assets like bonds and cash, with holdings of the latter now sitting at six-year lows. Indeed, November saw the largest monthly fall in cash holdings since President Trump was elected into office in late 2016. 

A further sign of rising optimism was seen on the VIX, a widely followed index which tracks market expectations of equity market volatility, as short bets hit all-time highs during November. This suggests that at present, market participants see little likelihood of a break-out in volatility, which would typically bolster demand for safe-haven assets. 

Given the developments in broader financial markets discussed above it is no surprise that precious metal prices eased during November. This was especially likely given the scope of the rally between late September 2018 and early September 2019 which saw the price of gold in US terms rise by more than 30%.

  

Central banks and ETF flows 

Preliminary estimates using Reuters data suggests that global gold exchange-traded fund (ETF) holdings fell by more than 2% during November, bringing an end to the impressive period of inflows which saw total global gold ETF holdings hit all-time highs in 2019.

The Perth Mint has continued to outperform its peers in the exchange-traded product space, with our ASX and NYSE-listed products both seeing growth during the month of more than 1% in terms of ounces backing each product.

Central banks remained in the news as they continued their gold purchasing and storage strategy throughout November. Most notably Poland took the decision to repatriate 100 tonnes of gold from London (worth USD 4.7 billion at November’s USD closing price), an operation carried out by logistics and security experts G4Si in a matter of months. 

Poland’s move represents a buying trend that has been in place for some time now. Central banks have not only been adding to reserves across recent months but are preferring to store more of it on home soil rather than keep their entire holdings in traditional vaulting centres such as London, Paris and New York.  

Political leaders in Serbia, Slovakia and Hungary have openly addressed the importance of boosting national gold reserves in 2019. Net central bank buying to end Q3 2019 totalled almost 550 tonnes, a 12% year-on-year increase. 

Continued strength in central bank gold demand is something we expect will continue for the foreseeable future given the trillions of dollars of sovereign debt trading at negative yields, continued calls for the reform of the monetary system and the fragile geopolitical and economic environment we face as we enter the 2020s.

Commentary from Saxo Bank’s Ole Hansen aligns with this view. The analyst stated in an interview with Kitco News that: “We have seen some pretty bold comments on gold from European central banks, and it might not take much for them to become gold buyers. Some countries are really struggling with negative interest rates. It’s really destroying wealth. Whether you are a central bank or a private investor, gold is an attractive asset in a world of negative yielding interest rates.”

Economic outlook deteriorating in Australia

In Australia, the case for gold as a long-term investment continues to gain momentum with markets now pricing in a further interest-rate cut by May 2020. This would bring the local cash rate to just 0.50% or -1.20% in real terms, assuming official inflation rates currently sitting at 1.70% stay constant in the months ahead. 

More pessimistic forecasters, including Westpac Bank’s Chief Economist Bill Evans, see rates falling to just 0.25% by June 2020. Evans also expects the Reserve Bank of Australia (RBA) to implement quantitative easing (QE) at some point in the second half of 2020.

Should this come to pass, it has the potential to boost demand for gold in several ways:

•     Lower interest rates themselves reduce the opportunity cost of investing in gold, helping to drive demand.
•     Lower rates and QE can be expected to put downward pressure on the value of the Australian dollar. Precious metal investors would benefit from this tailwind should the AUD continue to lose value over the USD as it has done across the past 12 months. 

Finally, there is also the ‘confidence’ factor. Lower rates and QE have the potential to deflate consumer confidence which would encourage frugality rather than greater spending. 

This seems to be occurring right now with news that the Australian consumer confidence index hit a four-year low in late November 2019. According to the data, Australians are particularly worried about their future financial conditions. 

The latest private sector credit statistics also highlight how cautious Australian households are with overall credit growth running at just 2.5% for the year to end October 2019. That is an almost 50% decline relative to the rate of growth seen at the same time last year with falling growth rates seen across housing, personal and business loans.

In addition, data released in late November shows that total private capital expenditure also fell in Australia across the September quarter. Dropping more than 1% across the past 12 months, the reduction in capital spend indicates how cautious the Australian business community is right now. 
 
Over time, these developments can be expected to not only limit overall economic growth, but also the returns generated by traditional asset classes. 

They also reinforce the value of gold as a key component of a well-balanced investment portfolio given the metal’s historical outperformance in environments where traditional asset class returns are constrained and real cash rates are low. 

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

Australian Consumer Confidence
https://www.fxstreet.com/news/australia-consumer-confidence-drops-to-four-year-low-anz-201911260503

Credit growth
https://www.macrobusiness.com.au/2019/11/australia-plunges-towards-outright-deleveraging/

Bill Evans on QE
https://www.macrobusiness.com.au/2019/11/bonds-launch-as-westpac-declares-qe-a-go-in-2020/

Capex Intentions
https://www.macrobusiness.com.au/2019/11/capex-intentions-ring-alarm-bells/
RBA on QE
https://www.rba.gov.au/speeches/2019/sp-gov-2019-11-26.html

Bank of America FOMO
https://www.marketwatch.com/story/fear-of-missing-out-triggers-huge-fund-manager-shift-from-cash-to-stocks-bank-of-america-merrill-lynch-says-2019-11-12

Investor growth optimism
https://markets.businessinsider.com/news/stocks/investors-are-rushing-invest-in-stocks-to-calm-market-fomo-2019-11-1028681853

Record highs for stocks
https://www.marketwatch.com/story/dow-futures-flat-after-another-round-of-stock-market-records-2019-11-26

Records set for US stocks and 60/40 portfolios
https://www.bloomberg.com/amp/news/articles/2019-11-29/records-set-billions-minted-it-will-be-hard-to-top-2019-stocks

Record short bets on VIX
https://seekingalpha.com/article/4305207-vxx-record-bearish-bets-vix-futures-create-opportunity

Saxo Bank on Central Bank Gold Buying
https://www.kitco.com/news/2019-11-29/2020-could-see-more-European-central-banks-buy-gold-Saxo-Bank.html

G4Si gold repatriation for Poland
https://www.g4si.com/newsroom/2019/11/28/how-billions-in-gold-was-secretly-moved-from-london-to-poland

Bloomberg articles on central bank gold demand
https://www.bloomberg.com/news/articles/2019-11-29/gold-is-the-new-obsession-for-east-europe-s-nationalist-leaders?cmpid=BBD112919_MKT&utm_medium=email&utm_source=newsletter&utm_term=191129&utm_campaign=markets
https://www.bloomberg.com/news/articles/2019-11-19/keep-buying-gold-to-brace-for-crisis-serbian-leader-tells-bank?cmpid=BBD112919_MKT&utm_medium=email&utm_source=newsletter&utm_term=191129&utm_campaign=markets
https://www.bloomberg.com/news/articles/2019-11-28/u-k-can-t-be-trusted-with-gold-top-slovak-party-leader-says?cmpid=BBD112919_MKT&utm_medium=email&utm_source=newsletter&utm_term=191129&utm_campaign=markets

Support levels for gold
https://thedailygold.com/checking-in-on-gold-silver-sentiment/
https://www.sprottmoney.com/Blog/key-levels-to-watch-in-gold-and-miners.html



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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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