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Why, how, now: SMSF trustees are turning to gold

Topics [ SMSF ]

At this week’s SMSF Association Investor Event in Sydney, Perth Mint Senior Investment Manager Jordan Eliseo discussed the why, the how and the now of SMSF investing in physical precious metals. We share his insights below.

Why buy gold?

There are typically five key reasons SMSF trustees invest in physical gold (and silver).

The first of those is that, like the share market, gold has delivered quite strong returns over the long run. Some years are obviously better than others, with gold’s best ever annual return coming in at more than 100% back in 1979. It has its bad years, too, with the worst ever calendar year return recorded in 1981 when gold fell by almost 30% in just 12 months.

Putting the best and worst years to one side, and looking at the long run return, we can see that from the 1970s to the end of 2018, gold appreciated in value by more than 8.5% per annum.

Of particular interest to SMSF trustees is gold’s historical ability to perform strongly both when equity markets fall and/or when the “real” cash rates (which factor in inflation) are low. An asset that has these qualities can be of benefit to portfolios, particularly those with large holdings in listed equities, and cash or term deposits, which many SMSF trustees hold.

To help illustrate these points, while gold tends to underperform shares during years when the share market goes up, in years when the stock market falls in value, the average return of gold is +15%, benefitting any investor with bullion in their portfolio.

You can see this in the chart below.


Source: Reuters, The Perth Mint

As a potential alternative to cash, gold has historically come into its own when real rates are 2% or lower as investors move their money out of bank accounts and term deposits due to the low returns, and instead invest in other assets, of which gold is one.

To that end, over the past four and a half decades plus, in years when the real cash rate has been 2% or higher, gold has averaged a return of only 4%, with its best and worst years coming in at +29% and -29% respectively.

But during years when the real cash rate has been below 2%, despite having the odd year of poor performance, including one when it fell 21%, the average return from gold has been more than 20%. Gold has also historically outperformed shares and bonds in these years.

This analysis of gold in various real cash rate environments is based on a detailed study from The Perth Mint completed using Reuters data, with a soon to be released SMSF whitepaper delving into these issues in more detail.

Finally, gold is simple to buy and store, making it easy to incorporate into a portfolio, and acts as a hedge against the falling dollar.

All these factors are making the precious metal increasingly appealing to SMSF investors.

How to buy gold for your SMSF

Depository solutions

Due to their ongoing reporting obligations, it is considered best practice for SMSF trustees who are investing in gold to use a depository solution. This option provides a bullion broker to trade metal as well as provide storage, insurance and ongoing reporting (EOFY valuations) to assist the SMSF trustee meet their reporting obligations.

The Perth Mint is uniquely suited in terms of the investment solutions it offers SMSF trustees.

Our depository solutions offer a combination of phone trading and support, 24/7 online trading access, competitive fees, fully insured storage and all the transactional and valuation data a SMSF trustee requires.

ASX-listed product

Our ASX-listed product (ticker code PMGOLD) is another simple option for SMSF trustees to use.

Backed by physical bullion, PMGOLD is easy to trade as each unit represents 1/100th of an ounce of gold.

Therefore, if the gold price in Australian dollars is $1,800 per oz, you’d expect PMGOLD to be trading at $18 per share. PMGOLD is also competitively priced, with a management fee of just 0.15%, making it a cost effective way to buy and hold bullion in your SMSF.

Unique government guarantee

As the only government guaranteed gold depository in the world, all holdings are guaranteed by our sole owner, the Government of Western Australia, under the Gold Corporation Act 1987.

Secure vaulting

All precious metal held on investors’ behalf is safeguarded in our central bank grade vaults, the largest such network in the southern hemisphere.

 

What the current economic climate can mean for gold

It’s no surprise that gold demand in the US and Europe soared in the aftermath of the Global Financial Crisis (GFC).

While quantitative easing and fears (so far largely unrealised) of higher inflation were part of that demand, the other arguably more powerful factor was the reduction of real cash rates towards or below zero.

As discussed above, investors naturally looked for alternatives in an environment where their bank deposits were earning nothing - and gold was a beneficiary. This trend is still in place in the northern hemisphere, and is now also taking shape in Australia too, with an already record low cash rate of just 1.50% likely to be cut in the months ahead. Indeed if current market pricing turns out to be accurate, it’s looking like the cash rate will be just 1% by mid to late 2020.

Any increases in the cash rate, should they eventuate, are likely to be incredibly gradual, with 10-15 year bond yields currently suggesting we’ll be in a low cash rate environment for years to come. Australian savers, including SMSF trustees, will continue to look for cash “alternatives” in this market, and we expect gold demand will benefit as a result.

Coupled with historically expensive financial assets, the desire to move a portion of one’s portfolio into alternative, safe haven investments will continue to grow.

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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Warning sign suggests now may be the time for gold!

Topics [ gold market gold analysis gold investment ]

Key Points

 • History suggests we are at a point in the market cycle from which gold will outperform stocks in the coming years.

 • Gold’s outperformance relative to stocks has averaged over 50% in the five years following previous yield curve inversions.

 • Nominal returns on cash and bonds, as well as inflation rates, are lower today than recorded levels at previous yield curve inversions.

 • Equity valuations are higher today compared to all previous yield curve inversions except for February 2000.


Global bond markets dominated the attention of investors and financial market commentators last week, with yields on some developed market government bonds falling to record lows. In Australia, 10 year government bonds dropped to all time record lows around 1.75% at one point.

Attention has particularly focused on the US, where the yield curve has inverted for the first time in more than a decade. The last time this phenomenon occurred was just before the start of the Global Financial Crisis (GFC).

What does yield curve inversion mean?

For those unfamiliar with the phrase ’yield curve inversion’, it is simply a circumstance where short term bonds, for example a two year government bond, have a higher return than a longer term bond, for example a 10 year government bond.

Note that yield curve inversion doesn’t have to refer to two year and 10 year bonds exclusively. Indeed right now it’s one year and 10 year bonds that have inverted.

Irrespective of which bonds you’re specifically referring too, typically you’d expect longer term bonds to have higher yields than shorter term bonds. There are a number of reasons for this including the need to compensate investors for taking on greater risks in a longer term loan, as well as them having a greater opportunity cost in terms of investment they’ll have to forego. This is because it will take longer for them to get their money back in a long term bond, relative to a short term bond.

As such, yield curve inversions do not occur all that frequently in financial markets, and when they do, they are typically seen as a bad omen in terms of what is likely to happen in the economy in the years that follow. As one market analyst, Jeffrey Halley, stated to Bloomberg earlier this week: “Bond markets globally, along with dovish central banks, have been telling us a slowdown is on the way.”

Yield curve inversions often, though not always, precede recessions, or outright falls in total economic output. This is why market analysts, economic commentators and policy makers are concerned with present day developments, and the inversion that is taking place today.

What has happened to markets in the past?

Over the past 40 years in the US there have been four previous periods where the yield curve has inverted, with a US two year government bond having a higher yield than a US 10 year government bond. These occurred in August 1978, a decade later in December 1988, again in February 2000, and most recently in December 2005 (please see end of article for our data sources and inversion methodology).

The chart below highlights what happened to the price of gold, and the price of the S&P 500*, in the one, three, and five year periods that followed those four previous yield curve inversions, with all returns expressed in percentages.

Note that the data in the chart below represents the average return across all four periods, with a more granular and highly detailed breakdown of the returns generated by gold and stocks following each individual yield curve inversion provided at the end of this article.

*The S&P 500 is widely regarded as the best single gauge of large cap US equities.

As you can see, on average, gold prices have strongly outperformed equities in the one, three and five year periods following on from previous yield curve inversions, with a positive performance differential that gets larger over time.

Over one year, the average performance of gold at just over 16% is almost double that of equities, whilst over three years, the average return for gold is more than 45% higher, with equities actually suffering a minor decline in value.

Extend the analysis out to five years and the average return of gold is more than 50% higher than equity markets historically delivered, with gold prices up almost 80%.

Were a similar scenario to play out in the years ahead, it would not be unreasonable to expect the gold price to be trading at almost USD 2,400 per oz by 2024, based on the gold price today, which is trading just below USD 1,300 per oz.

As the more granular data at the end of this article will highlight, the above chart doesn’t mean that gold outperformed each and every time the yield curve inverted, and indeed in the one, three and five years that followed the 1988 inversion, stocks turned out to be a more profitable place to invest than gold.

Is gold guaranteed to outperform?

In a word, no.

There is a good reason why fund managers and the like must disclose the fact that past performance is no guarantee of future returns, or results. Gold for one didn’t outperform in all prior periods of curve inversion, with the years following the 1988 yield curve inversion far kinder to stock markets than bullion investors.

There are also some obvious differences between the current scenario we are facing in markets, and historical periods where the curve inverted. Inflation for one is far lower today than the 1970s and 1980s, while central bank activity in the bond market over the last few years may have impacted the effectiveness of yield curve inversion as a recession risk warning.

While US, and indeed global growth rates are slowing, the US economy is still expanding, growing at an annualised rate of 2.6% in the last quarter of 2018 (the latest available data). We are likely some time away from a recession, should it eventuate at all.

Be that as it may the data presented above, and below in the more granular breakdown of each period below, is clear. If history is any guide, there is a good chance that gold bullion will outperform financial assets in the years ahead.

This argument is further supported not only by the rich valuations in stock markets today, but the very low real yields on offer in traditional defensive assets, including the almost USD 10 trillion in negative yielding sovereign debt.

At the very least, prudent investors will be looking at gold as a way of protecting capital in what may turn out to be a challenging period for the global economy and financial markets.

Until next time…

Jordan Eliseo

1978 yield curve inversion

The following chart highlights the one year, three year and five year performance for gold and the S&P 500 following on from the 1978 yield curve inversion. The table that accompanies it highlights nominal two and 10 year yields, the gold price, CPI, the Federal Funds rate, and “real” cash and bond rates. The table also shows both the price level of the S&P 500 and the cyclically adjusted price to earnings ratio (CAPE) for the S&P 500 as well, with these data points shown in the month the curve inverted, as well as in the two years preceding inversion, and the three years after.

Highlights:

 • Gold outperformed equities over one year, three years and five years following on from the 1978 inversion

 • Outperformance was most pronounced over three years, with a differential of almost 80%

 • While nominal cash and bond rates were high in the 1970s (above 8%), so was inflation, which was on its way from under 6% in 1976 to almost 12% by 1979

 • From a valuation perspective, equities remained “cheap” over this entire time period, with the CAPE ratio sitting between eight and 12.

1988 yield curve inversion

The following chart highlights the one year, three year and five year performance for gold and the S&P 500 following on from the 1988 yield curve inversion. The table that accompanies it highlights nominal two and 10 year yields, the gold price, CPI, the Federal Funds rate, and “real” cash and bond rates. The table also shows both the price level of the S&P 500 and the cyclically adjusted price to earnings ratio (CAPE) for the S&P 500 as well, with these data points shown in the month the curve inverted, as well as in the two years preceding inversion, and the three years after.

Highlights:

 • Gold underperformed equities over one year, three years and five years following on from the 1988 inversion

 • Underperformance was most pronounced over 5 years, with a differential of almost 70%

 • Nominal cash and bond rates were high in the late 1980s, whilst inflation was more subdued, with real yields of over 4%, whilst equities were re-rated higher in the aftermath of the 1988 inversion, with the CAPE ratio rising from 14.70 to 21.16 between 1988 and 1993

 • This more positive environment for financial assets helps in part to explains gold’s relatively poor performance in this time period

2000 yield curve inversion

The following chart highlights the one year, three year and five year performance for gold and the S&P 500 following on from the year 2000 yield curve inversion. The table that accompanies it highlights nominal two and 10 year yields, the gold price, CPI, the Federal Funds rate, and “real” cash and bond rates. The table also shows both the price level of the S&P 500 and the cyclically adjusted price to earnings ratio (CAPE) for the S&P 500 as well, with these data points shown in the month the curve inverted, as well as in the two years preceding inversion, and the three years after.

Highlights:

 • Gold and equities fell in the one year following the February 2000 yield curve inversion

 • Gold outperformed over three and five years, beating equities by 60% over both timeframes

 • Real cash and bond rates were still positive (2.5%-3% depending on duration), giving investors multiple defensive options for their portfolios

 • Equities were incredibly expensive heading into 2000, trading at over 40 times CAPE. This number fell dramatically in the five years that followed, helping to explain the poor results for the share market, and the strong returns delivered by gold

2005 yield curve inversion

The following chart highlights the one year, three year and five year performance for gold and the S&P 500 following on from the 2005 yield curve inversion. The table that accompanies it highlights nominal two and 10 year yields, the gold price, CPI, the Federal Funds rate, and “real” cash and bond rates. The table also shows both the price level of the S&P 500 and the cyclically adjusted price to earnings ratio (CAPE) for the S&P 500 as well, with these data points shown in the month the curve inverted, as well as in the two years preceding inversion and the three years after.

Highlights:

 • Gold strongly outperformed equities over one year, three years and five years following the 2005 inversion

 • The most pronounced outperformance occurred over five years, with gold up almost 175% whilst equities were largely flat

 • This outperformance was driven by a handful of factors, including the occurrence of negative real interest rates, and the Federal Reserve undertaking Quantitative Easing in the aftermath of the GFC, both of which limited the attractiveness of traditional defensive assets and buoyed gold demand

 • A sharp decline in equity valuations also contributed to the outperformance of gold

Notes on data and calculations

Where possible, we have used monthly data points for calculations included in this article, with much of that data sourced from Reuters. Inflation data was sourced from the St Louis Federal Reserve, whilst S&P 500 data (monthly prices and CAPE) was sourced from Robert Shiller/Yale, which is available for public download from here

The article and the charts and tables used within it are based on our classification of yield curve inversions as having occurred from the month end that two year yields first closed above 10 year yields, provided two year yields then remained above the 10 year yields for at least three months.

As an example, according to Reuters data, two year yields exceeded 10 year yields at the end of June 1978, but not in July 1978. By end August 1978, two year yields again exceeded 10 year yields, and did so until April 1980. Hence we use August 1978 as the starting point for that yield curve inversion.

Using daily or weekly data points, a different data source, or a different definition for yield curve inversion would generate different results to those we have published.

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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SMSF trustees go for gold

Topics [ SMSF ]

The Perth Mint was proud to participate in last week’s SMSF Association National Conference in Melbourne. The conference hosted more than 1,600 attendees, the vast majority of whom are service providers to the AUD700 billion and growing SMSF industry, including financial planners, accountants and auditors.

Throughout the three-day event there was huge interest in The Perth Mint’s range of investment products, from our depository solutions to traditional physical bars and coins, and the smartphone app GoldPass®. Using the latest technology, GoldPass® allows investors to securely trade, transfer and store physical gold via digital certificates.

There were also a lot of inquiries regarding our listed investment offerings. These include our ASX listed product PMGOLD, which has been trading since 2003, and our recently launched physical gold ETF, ticker code AAAU, which trades on the New York Stock Exchange.

For those interested to learn more about our investment solutions, this recently published blog covers the many ways in which The Perth Mint meets the diverse needs of the world’s bullion investors: How to buy gold: simple, safe and secure options available at The Perth Mint

From our discussions with the many financial intermediaries and direct investors who visited our booth over the course of the conference, it became clear there are three primary factors driving the increased interest from SMSF trustees in gold, silver and precious metals more generally: 

 • Increased stock market volatility. The Q4 2018 sell off in equity markets helped drive safe haven demand for precious metals, with USD and AUD gold prices now back above USD1,300oz and AUD1,800oz respectively; 

 • Continued concerns regarding a potential decline in the AUD. This has fallen from USD0.78 to USD0.72 in the past year. Any further falls will boost the price of gold denominated in AUD. 

 • The potential for interest rates in Australia to move lower in 2019 and beyond. Up until late last year, market pricing suggested the next move in domestic interest rates was likely to be an increase. The situation today is not so clear given volatility in financial markets, decelerating growth rates across the globe and a more cautious tone from some of the most influential central banks, including the Federal Reserve. All of these issues are impacting on the outlook for monetary policy in Australia. Indeed markets are now pricing in at least one more interest rate cut from the RBA, with expectations that the cash rate will decline to 1.25% by next February. 

Should domestic interest rates be cut, and should this occur alongside a decline in the value of the AUD with a continued period of heightened stock market volatility, the outlook for gold, in terms of its price and demand for physical bullion, is bright. 

This is due to the fact that gold is the one asset which typically outperforms other investments when the value in equity markets falls. It has a long history of strong returns whenever real cash rates are low due to the reduced opportunity cost of holding a non-income bearing asset. 

Coupled with its tangibility and its high liquidity, the attributes outlined above help explain why gold can play a vital role in any diversified portfolio, including those of the one million plus Australians who manage their superannuation through a SMSF. 

Until next time…



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