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Measuring global gold market liquidity

Topics [ gold investing ]

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

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

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

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

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

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

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


Source: The Perth Mint, World Gold Council

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

Where is gold traded? 

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

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

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


Source: The Perth Mint, World Gold Council

Takeaway for investors

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

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

References

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




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Gold corrects as markets look to US election

Topics [ market analysis Market update ]

The gold price fell by more than 3.50% in US dollar (USD) terms during September, undergoing an overdue correction after the explosive gains seen earlier in the year. Long term, the outlook for precious metals remains positive with a range of macro-economic and monetary factors driving investors toward precious metals.

Executive summary
The gold price fell by more than 3.50% in USD terms during September, finishing the month at USD 1,886.90/oz.

In Australian dollar (AUD) terms the gold price was basically flat, finishing the month trading at AUD 2,654.62/oz. 

The decline in the AUD, which fell by 3.35% vs the USD and finished the month at USD 0.7108, mitigated losses for local investors.


Silver fell by more than 15% in USD terms, pushing the gold to silver ratio to 79.


Rising real yields and an increase in the USD index helped drive the correction in precious metals.


ETF inflows continued, but at a much slower pace, whilst managed money investors reduced their long exposure in the second half of the month.


The outlook for financial markets is likely to remain uncertain in the lead up to the US Presidential Election in early November.


Full monthly review – September 2020 


The gold market continued its correction from the all-time highs seen in early August, when the precious metal traded at more than USD 2,050 per troy ounce, to drop by more than 3% during September.

Silver was hit even harder, falling by more than 15% in USD terms to close the month trading just below USD 24.00 per troy ounce. Despite the pullback, silver prices are still almost double what they were in March 2020. The gold to silver ratio finished September at 79.

There were at least three primary contributors to the decline in precious metal prices seen during September.

Rising USD

The USD index increased by more than 2.50% at one stage though it gave up some of this gain to close the month up by 1.9%. This contributed to the pullback in gold, which often struggles in environments where the greenback is rallying. 

Growth in real yields

Whilst bond yields remain negative in real terms across most of the developed world, they did manage to rise during September. The table below highlights the real yields on US Treasuries of various maturities from five years to 30 years as at 31 August and 30 September 2020, as well as the movement across the month. 


Source: US Department of the Treasury

Long term, negative real yields on sovereign debt are likely to remain one of the key factors driving increased strategic asset allocations to gold. Short term, any increases in real yields can act as a headwind, particularly when that increase is driven by declining inflation expectations, which is what transpired during September.  


Loss of momentum

Another factor contributing to the pullback in precious metals was a simple loss of momentum, with gold, and silver to an even stronger degree, unable to maintain the blistering pace of price gains seen this year.

It was inevitable that this would happen eventually, as no market goes up in a straight line. Indeed, it is a healthy part of any bull market to go through corrective periods, with what we believe was an overdue correction in gold explored in more detail below. 

Cracks in other markets appearing 


Precious metals were not the only market to correct during September, with global equities also pulling back. The S&P 500 dropped by more than 7.5% at one point, though pared some of the losses to close the month down by approximately 4%. The ASX 200 in Australia experienced a correction of similar magnitude. 

Market drivers included concerns regarding the stimulus package being debated in Washington, uncertainty surrounding the upcoming US Presidential Election, and growing fears that the spread of COVID-19 is again accelerating in parts of the Northern Hemisphere. 

Gold correction was overdue


For some time now, we have been warning of the potential for a correction in the gold price. The market rallied very strongly from under USD 1,200 per troy ounce in September 2018 to more than USD 2,050 per troy ounce in August 2020, an increase of almost 75%. 

By August 2020, the gold price was trading 26% above its 200-day moving average (200DmA), which was a warning sign that some short-term froth was evident in the market.

To highlight this, consider the chart below, which displays the USD spot price of gold from December 1999 to the end of September 2020 (gold line). It also shows how far the gold price was trading above or below its 200DMA (black line) on any given day over this period.


Source: The Perth Mint, Reuters 

As you can see, there have been several occasions across the past 20 years where the gold price traded at 20% or more above its 200DMA. These have typically been short lived, with the market generally giving back some of these gains in a period of consolidation.   

The table below highlights this clearly, showing the previous periods where gold was trading at more than 20% above its 200DMA, the gold price at the time, and the three-month and three-year returns that followed. 


Source: The Perth Mint, Reuters
*This figure represents the gold correction from 6 August 2020 to 30 September 2020. The three-month return will not be known until 6 November 2020.

The table makes it clear that on every prior occasion that gold was trading at more than 20% above its 200DMA, the price fell in the following three months, resulting in an average pullback of almost 10%. 


Those corrections typically proved to be good times for investors to add to their precious metal holdings. As the table demonstrates, the gold price generally increased in the three years following on from these strong rallies. The only exception of course was what happened after 2011, with gold priced in USD falling into a bear market that carried on until the end of 2015.


Whilst there are no guarantees, the economic, monetary and financial market environment investors face today is vastly more supportive of gold than it was in 2011. 

Given this, there is a reasonable chance that the current pullback we are seeing in gold is similar to those we saw in 2006, 2008 and 2009.  

Investors continue to acquire precious metals


Investors continued to allocate to precious metals in September, albeit at a slower pace than we’ve been accustomed to for most of 2020.

Perth Mint minted gold bar and coin sales totalled just over 62,000 ounces. While this is a long way short of the sales numbers seen in March and April (when we sold 93,775 and 120,504 ounces respectively), it is still more than 50% higher than the average monthly sales reported between mid-2012 and 2019.

Global gold ETF holdings increased by 47.49 tonnes (data to 25 September only), a sharp slowdown compared to the first eight months of the year which saw average inflows of almost 120 tonnes per month. 

This trend has also been experienced in Australia, with Perth Mint Gold (ASX:PMGOLD) holdings increasing by just over 1% in September. It had grown by more than 70% in the eight months to end August. 

In the futures market, managed money longs (those betting the gold price will rise) reduced their exposure in the second half of the month, with positions falling from 166,571 contracts as at 15 September to just 140,320 contracts by September 29. This position changing will have contributed to the decline in the gold price we saw in mid to late September.

Outlook 

A period of heightened volatility in precious metals and other markets would not be unexpected in the weeks ahead, with multiple risk factors at play. 

The first of these is the US Presidential Election, which is due to take place on 3 November 2020. While the polls and betting markets continue to favour Joe Biden and the Democratic Party, much could change in the next four weeks, especially with news in early October that US President Donald Trump and his wife have fallen ill with COVID-19. 

The threat from COVID-19 is obviously not limited to the White House, with the spread of the virus appearing to accelerate recently in parts of Europe and North America. Should the situation continue to deteriorate, not only will global growth figures again be revised down, but policymakers will be under even more pressure to deliver another round of fiscal and monetary stimulus. 

Given this backdrop, we would not be surprised to see continued demand for precious metals from investors wanting to diversify their portfolios, even if gold and silver prices themselves continue to correct or trade sideways in the coming weeks. 

Jordan Eliseo
Manager – Listed Products and Investment Research 
The Perth Mint
6 October 2020

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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New USD record gold price in August

Topics [ market analysis gold investment Market update ]

Gold prices hit a record high above USD 2,000 per troy ounce in August 2020. Expensive financial markets, negative real yields and the ongoing threat from COVID-19 continues to drive demand as a growing number of investors include the precious metal in their portfolio.


Executive summary

•  The gold price in US dollars (USD) closed above 2,000 per troy ounce for the first time in history in early August 2020.

•  Despite the record high, gold ended the month trading at USD 1,967 per troy ounce, essentially unchanged for the month.

•  The Australian dollar (AUD) gold price finished August trading below AUD 2,700 per troy ounce, down 2% for the month due to continued strength in the AUD.

•  Risk assets continued to rally last month, with the S&P 500 hitting new all-time highs and recording its strongest return for August in more than 30 years. 

•  ETF gold holdings continued to rise, though the rates of acquisition slowed relative to demand seen earlier in the year.

Full monthly review – July 2020 

Gold prices hit an all-time high in nominal terms in August 2020, closing above USD 2,000 per ounce for the first time on 5 August. The precious metal was unable to maintain this momentum despite the continued decline in real yields, with gold finishing the month at USD 1,967 per troy ounce, essentially unchanged throughout August.

Silver continued to rally, ending August above USD 28 per troy ounce and recording a 16% increase for the month. From the lows seen in March this year, silver has now doubled in price in USD terms. This is reflected in the gold to silver ratio now having declined from more than 110 at the end of February 2020 to below 70 by the end of August.

While gold and silver have been receiving plenty of media attention, the real action in August was seen in equity markets as share prices of market darlings like Tesla soared. 

August 2020 also saw Apple become a USD 2 trillion company, doubling its valuation in barely two years as investors go all-in on technology stocks. Although some of the companies enjoying rapid price gains are true economic powerhouses, the broader froth in this sector, and the multiples of earnings investors are willing to pay, is reminiscent of the bubble in the NASDAQ seen almost 20 years ago. 

That NASDAQ bubble of course ultimately burst, with the peak in that cycle almost perfectly coinciding with the beginning of the now two decade-long secular bull market in gold. 

We discuss the equity market rally and the challenge it poses for investors below. We also examine other key developments in the economy, and in precious metals and investment markets, during August 2020. 


Federal Reserve announces strategy change at Jackson Hole

The highlight of the economic calendar in August was the annual economic policy symposium hosted by the Federal Reserve at Jackson Hole. 

This year, in a move widely anticipated by financial markets, Federal Reserve Chairman Jerome Powell updated the monetary policy framework of the Federal Reserve, releasing a new Statement on Longer-run Goals and Monetary Policy Strategy.

The key to this, in the eyes of the market at least, is the adoption of what is being called ‘average inflation targeting’. Going forward, The Federal Reserve will be happy to see inflation run at more than 2% per annum (which is still its preferred inflation rate over the long run), to make up for years where inflation rates have been less than 2%. 

This move helped drive a continued decline in the value of the USD, which fell another 1.44% (based on the USD index) in August following a 4% decline in July. 


Australian dollar continues to rally
 

The rally in the AUD continued during August, rising by almost 2%. 

Ending the month trading at more than USD 0.735, the AUD has now increased by over 30% since the lows in the middle of March, when it was trading closer to USD 0.55.

Had the currency remained at the levels seen in March, the AUD gold price would now be trading above 3,500 per troy ounce, which is almost AUD 800 per troy ounce higher than where it sits today.

While that may frustrate some investors that have already bought and who would like to see a higher price, it’s a good thing for any Australian investor still wanting to put some money into precious metals. 

All other things being equal, it means they can get more bang for their buck when converting AUD into gold, silver or platinum today, relative to what they would have been able to buy had the AUD not rallied in the past few months.

It is worth noting that it is not just the USD that the AUD has been appreciating against. The AUD also appreciated versus the trade weighted index by 1% in August and by more than 25% since mid-March.


ETF holdings continue to grow

Gold ETF holdings continued to increase in August, with inflows of 23 tonnes seen in the first three weeks of the month (full end August data not available at time of writing). That is an increase of 0.50% relative to where holdings were sitting at the end of July.

While this represents continued demand for the precious metal, it is also a notable slowdown from the pace of buying seen earlier in the year which saw average inflows of more than 128 tonnes a month in the first seven months of the year. 

Australian investors are again outperforming in terms of gold demand for ETFs relative to global peers, with Perth Mint Gold (ASX:PMGOLD) seeing holdings increase by more than 5.5% in August.

Strong demand is also being seen for minted bars and coins, with Perth Mint sales of minted gold products up 20% in August. Across the course of 2020 The Perth Mint has on average sold 64,000 ounces of minted gold per month, a 50% increase relative to the average monthly sales seen between 2012 and the end of 2019.

Risk assets rally, but caution warranted


While gold’s record-breaking rise above USD 2,000 per ounce in August attracted global media attention, the real rally occurred in the equity market, or more specifically the technology companies that dominate major indices like the S&P 500.

Indeed, the S&P 500 recorded its best August performance since 1984, with the US market now up more than 55% since the lows seen in March. 

Great news for stock market investors, this rally does pose a challenge for investors looking ahead, as it’s largely been driven by fiscal and monetary stimulus rather than a sustained improvement in economic fundamentals. 

The result of this is we now find ourselves in a situation where valuations for equity markets are at historically elevated levels, while traditionally ‘low-risk’ investments offer negative real returns. 

This challenge was neatly captured in a Bloomberg article in late August titled Low Rates Lead Investors to Look Beyond the Classic 60/40 Mix

The article noted that a 60/40 portfolio (60% stocks, 40% bonds) may struggle to deliver positive real returns in the years ahead as, “with bond yields so low and equity valuations so high, the strategy’s reputation for solid, steady returns is in serious doubt.”

We expect this situation to drive higher levels of gold demand in the years ahead and act to support prices. 

Unlike other alternative assets, physical gold can be low cost, is easily accessible for investors, and is generally seen as low risk on any metric other than short-term volatility.


Pension funds turning to gold

The increased demand that we are seeing for gold (and expect to continue to see) is not limited to retail investors with institutional investors beginning to see its appeal. 

Bloomberg reported last month that the USD 16 billion Ohio Police and Fire Pension Fund had approved a 5% allocation to gold to “help diversify its portfolio and hedge against the risk of inflation.” 

We suspect we will see more pension funds, as well as insurance companies, family offices and the like move to include a gold allocation in their portfolios in the years ahead.


Modern Monetary Theory is coming

The growing discussion around, and indeed support for, Modern Monetary Theory (MMT) can be expected to support gold demand in the years ahead. 

Last month the ABC ran a radio program with high profile journalist Alan Kohler discussing MMT. Titled It’s ok to print money, the segment examined the benefits of adopting MMT and its approach to monetary and fiscal policy. 

From our perspective, we think we are already living in a quasi-MMT economy and monetary environment, with central banks monetising large portions of budget deficits in 2020. 

As an example, according to a study by economist Gerard Minack, the US Federal Reserve increased its holdings of US Treasuries from June 2019 to June 2020 by USD 2.2 trillion. This almost perfectly matched the USD 2.1 trillion increase in the US Federal Budget deficit over the same period. 

As Minack noted: “This is in every way that matters pure monetisation.” 

This debt monetisation is one of the factors that has driven the increase in inflation expectations in the past few months. As an example, US 5-year, 5-year forward inflation expectation rates ended August 2020 at 1.91%, more than double the level it was sitting at in mid-March. 

For as long as we continue down this monetary policy path, concerns around higher levels of inflation will remain, helping gold find support from investors. 

Jordan Eliseo
Manager – Listed Products and Investment Research 
The Perth Mint
3 September 2020

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. 


References

Ohio pension fund adds gold allocation to hedge risk, inflation, Bloomberg Law

Low rates lead investors to look beyond the classic 60/40 mix, Bloomberg

It's ok to print money, ABC Melbourne 

5 Key Takeaways From Powell’s Jackson Hole Fed Speech, Bloomberg Opinion

Fed to overhaul approach for controlling inflation to better handle future downturns and reach full employment, Jerome Powell says, Market Insider


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Silver surges as gold hits all-time high in USD

Topics [ gold analysis GoldPass Market update ]

The USD gold price hit record highs in July, trading above USD 1,960 per troy ounce. Silver also rallied strongly, up by more than 30% for the month. Declining real yields and a weak US dollar are driving the market higher, with investors increasing their portfolio allocations to the precious metals. 

Executive summary

•  Gold prices rose 11% in July to hit an all-time high in USD terms, trading at more than USD 1,950 per troy ounce.

•  Silver was an even better performer, increasing by 35% to close the month at more than USD 24 per troy ounce.

•  A decline in the USD, which fell by more than 4% during the month, and a continued plunge in real yields were the primary drivers of the precious metals market. 

•  Gold ETF holdings increased again in July, continuing their record run seen in 2020.

•  Overall gold demand has been held back by a circa 50% drop in demand from China and India in H1 2020 relative to a year ago. 


Full monthly review – July 2020 

Precious metal prices delivered one of their strongest months on record in July. Gold captured most of the headlines with prices touching a new all-time high in nominal USD terms above USD 1,960 per troy ounce toward the end of the month.

Prices have continued to climb in early August, with spot gold topping USD 2,000 in overnight trading.

The precious metal has now hit record prices in most currencies over the past few years, with the gold price in USD the last domino to fall.  

July 2020 also saw other markets making records, with the S&P 500 ending the month at an all-time high and the US 10-year treasury yield finishing the month at an all-time low. 

Whilst gold has now risen by almost 30% for the year, silver was the star performer in July, rallying by an incredible 35%. From the lows seen in late March 2020, silver has almost doubled in price and is now outperforming gold on a calendar year-to-date basis. 

AUD returns for gold and silver were modest, with the metals gaining 6% (gold) and 28% (silver) respectively in July. The smaller gains are a result of the continued strength in the AUD, which ended the month above USD 0.72, having now rallied by more than 30% vs the USD since its late March lows. 

The strong moves in precious metals seen in July were driven by multiple factors. These included weakness in the USD, a continued decline in the real yield on US Treasuries and rising market concerns regarding the economic impact of the steps being taken to slow the spread of COVID-19. 
 
This report addresses some of those factors.

USD weakness boosting gold

The USD index fell by more than 4% in July, its largest monthly decline in a decade. Various factors, including rising political uncertainty in the lead up the US Presidential election and a more than 30% decline in US GDP in Q2, contributed to the fall. 

Mounting concern about the long-term implications of the fiscal and monetary policy support being deployed into the US economy was also a contributing factor. A more than USD 2 trillion rise in the US budget deficit over the past year is being matched dollar for dollar with an increase in the holdings of US Treasuries sitting on the balance sheet of the US Federal Reserve. 

The weakness in the USD has been a tailwind pushing gold higher since late March. This can be seen in the chart below which shows both the gold price in USD and the USD index since the end of December 1999.

Source: The Perth Mint, Reuters

The chart highlights the fact that a weak USD is typically beneficial to gold, though it’s important to remember that gold is not dependent on a weak dollar to perform well. 

As an example, from the end of 2017 through to March 2020 the US dollar increased by approximately 10% while gold rose by more than 20% over this same period. 

Whilst a short-term snapback in the USD would not surprise, it appears as if there are now multiple headwinds conspiring to push it lower following a multi-year bull market that saw it gain more than 35%. 

Should a prolonged period of USD weakness eventuate, it will be another element of support for precious metal prices. 

Real yields continue to fall

Whilst the fall in the USD gained lots of attention in July, the continued decline in real yields on US treasuries was arguably an even bigger driver of the gold price. 

As a non-yielding asset, it should be no surprise that, all other things being equal, gold would tend to perform best when real yields on other assets fall, as it lowers the opportunity cost of investing in gold. 

The following chart plots the price of gold in USD and the real yield on the US 10-year treasury bond (which is inverted on the chart). It highlights how important real yields are to the gold price, with a very strong correlation over the past 15 plus years. 

Source: The Perth Mint, US Treasury, Reuters

Ending July 2020 at -1%, the real yield on US 10-year treasuries has never been lower, falling from +0.91% in September 2018. Since then, the price of gold has increased by almost 65% in USD terms. 

Gold ETF holdings continue to grow

At the time of writing end of month figures for July were not yet available, however data to the 24 July highlighted continued inflows into gold ETFs globally, with holdings increasing by more than 130 tonnes for the month so far. 

Australian investors remain a key driver of these inflows, with Perth Mint Gold (ASX:PMGOLD) seeing total holdings rise by more than 5% in July. 

Portfolio allocations to gold remain modest

Despite the surging price, and increase in demand for gold seen in 2020, investor allocations to the precious metal remain modest. 

This is a theme we explored in a detailed Livewire Markets article last month, where we presented ETF data that suggests portfolios have a less than 0.50% allocation to gold at present. 

Gold to silver ratio plunging 

Silver’s rise in July saw the gold to silver ratio (GSR) decline to just above 80:1 by the end of the month. July also saw silver ETFs record some of their biggest inflows in more than five years as investors increased their exposure to the metal.

Whilst a one month move of more than 30% is unusual, it needs to be looked at in the context of the violent sell-off seen in silver during March 2020. During that month, silver prices fell toward USD 12.00 per troy ounce, a decline of over 25%, which saw the GSR peak at more than 120:1.

This can be seen in the chart below, which plots the GSR on a monthly basis from the end of December 1999 to end July 2020, as well as the average GSR over this same period. It also shows the average GSR from 1970 to 2020.
 
Source: The Perth Mint, Reuters

Although we wouldn’t be surprised to see silver spend some time consolidating recent gains, a current GSR of more than 80 suggests that, relative to historical levels, it remains cheap compared to gold, even after the huge move seen last month. 

Retail demand weak

Whilst investment demand for gold in ETF form is running at all-time highs, other areas of the market are weak. The most notable is gold jewellery demand, which in H1 2020 totalled just 572 tonnes, down 46% relative to the figures seen a year ago. 

This is no surprise given the impact that COVID-19 has had in Asia, with higher gold prices and a reduction in disposable income understandably impacting demand. 

Total bar and coin demand also softened, coming in just below 400 tonnes in H1 2020, down almost 20% relative to the prior year. This was largely driven by very large falls in demand from Asia and the Middle East (off more than 50% in some countries in Q2 2020) with Europe and North America actually seeing rising demand. 

What’s next – caution in the short term

Whilst no one can be certain how markets will play out in the years to come, we doubt this will be the last time price spikes of 20-30% in a month for silver are seen, or the last time gold moves up by more than 30% in barely six months. 

Nevertheless, it’s also important to realise that no market moves in a straight line. 

To that end, whilst gold and silver’s incredible price strength and rising popularity as investments should be celebrated, investors should not expect gains like this to be repeated month in, month out. 

Indeed, with gold now having had an almost two-year run without any meaningful correction, and with investor bullishness soaring in light of the overnight move in gold above USD 2,000 per troy ounce, caution is warranted in the short term. 

A period of consolidation in which the metals potentially give back some of their recent gains is not unexpected. Should this occur, it would actually be a healthy thing for the market, helping shake out some of the froth that has built up in the past few months. 

Over the medium- to long-term the outlook for gold and precious metals demand remains positive, with the investment case to include gold in a well-balanced portfolio as strong as ever. 

Jordan Eliseo
Manager – Listed Products and Investment Research 
The Perth Mint
5 August 2020

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 ends financial year at record high as investors continue to accumulate precious metals

Topics [ market analysis GoldPass Market update ]

Gold ended June trading at more than USD 1,760 per ounce. Now up by 25% in the last year, the outlook is promising for a continued bull run in precious metals.  

Executive summary

Gold finished June trading at USD 1,768.10 per troy ounce, rising by 2.27% in June.
The price of gold has risen by 16.55% in US dollar terms (USD) and 18.83% in Australian dollar (AUD) terms in the first six months of 2020.
Silver prices also continued to rally, finishing the month up 2.4% in USD terms.
Demand for physical gold remains robust, though has eased from record levels seen earlier this year.
Expensive equity markets, low yields on traditional safe haven assets and the ongoing threat from COVID-19 are expected to support continued gold demand in the second half of 2020.

Full monthly review – June 2020 

The price of gold continued to rise in June, finishing the month trading at more than USD 1,760 per ounce. Matching the highest calendar quarter close on record set back in 2012, the yellow metal is now well and truly back on the investment radar after a strong rally in H1 2020 that has seen the price rise by more than 15% in USD terms. 

In AUD terms, while returns were more subdued the price closed June trading at more than AUD 2,500 per troy ounce, an increase of almost 20% in the past six months. 

Silver prices continued to rally in June, up 2.41% in USD terms, with the gold silver ratio (GSR) finishing the month at 99. Whilst this a sharp decline from where this ratio sat at the end of March when it was over 110, its worth remembering that the GSR started the year at just 85. Silver may have outperformed gold in the past three months, but it has a lot of catching up to do. 

Continued inflows into ETFs, rising inflation expectations and a minor pullback in equity markets in the last three weeks of June all contributed to the rally in precious metals, with gold finally pushing through USD 1,750 per ounce, a level that had provided some resistance earlier in the year. 

In this month’s report we look at the likely drivers of gold moving forward, as well as the latest developments in financial markets, including:

The ongoing threat from COVID-19;
Seasonality trends and why we are entering a historically strong quarter for gold prices;
Why managed money positioning in the futures market is a positive sign for precious metal bulls; and
Why soaring equity markets prove there are multiple drivers of gold demand today.

COVID-19 threat remains

The latest data from around the world indicates that the COVID-19 virus is spreading faster than ever, surpassing 10 million cases in late June. The United States and Brazil seem particularly hard hit, whilst Australia itself is not immune, with community transmission in places like Victoria now at record levels. 

The threat from COVID-19 will continue to complicate the path forward for the global economy for some time to come. It will weigh on economic output, negatively impact company earnings and force fiscal and monetary authorities to deploy larger amounts of stimulus for longer than they would like.

We’d expect to see gold continue to benefit from these trends, as it has for much of the past six months. 

Managed money positions are starting to build

Managed money positioning in the gold futures market has been relatively subdued since the COVID-19 threat emerged, with speculators positioned to benefit from a gold price increase paring back their exposure.

Indeed, between mid-February and early June, gross managed money long positions fell from 278,286 contracts to just 126,407 contracts, a decline of more than 50%. 

In the past two weeks gross managed money long positions rose to 161,593 contracts in a sign that speculators are again willing to increase their long exposure to the gold price. 

Note that as per the chart below, which shows movements in gross long positions and the USD gold price over the past 10 plus years, there is no sign of overexuberance. 

Holdings remain in line with their long-run averages, and at barely half the levels seen at some points in the past, with large increases in managed money longs typically helping push the gold price higher. 
 

Source: The Perth Mint, CFTC 

The fact that gold prices have performed as well as they have over the past three months without much support from this sector of the market is of itself a positive sign. 

If positioning in this space continues to build in the coming weeks, it could very easily help propel gold prices back towards all-time highs in USD.  


Equity markets remain euphoric

Despite the unprecedented slowdown in economic activity caused by COVID-19, equity markets enjoyed an enormous rally in Q2 2020, with the Dow Jones for example recording its strongest calendar quarter since 1987.

The rise in equity markets has been supported by all types of investors to a varying degree. Millennial investors in the US flocked to trading platforms like RobinHood, as well as traditional brokerage accounts offered by the likes of Charles Schwab and TD Ameritrade. Similar trends have also been seen in Australia.   

Hedge funds have also dramatically increased their allocations to the stock market in the past three months. Survey data from Bank of America Merrill Lynch suggests net exposure to stocks from these investors is near record highs, having risen from below 20% to more than 50% since April.

Institutional investors like pension funds also seem to have increased their exposure across the quarter, adding to the upside move in markets. 

The fact that gold rallied by more than 10% in USD terms alongside the huge increase in risk assets seen in Q2 aligns with historical observation which illustrates gold’s typically positive correlation to rising equity markets. It is also a positive sign as it demonstrates that investor appetite for bullion is not strictly limited to those seeking a hedge against falling equity markets, which was undoubtedly a major factor supporting demand in Q1.

Whether it be fears over higher inflation (with 10-year break even inflation rates continuing to rise in June, though they admittedly remain at low absolute levels), a desire to hedge against a potential weakening of the USD, or simply a wish to broaden the range of defensive assets within a portfolio given continued negative real yields on most government bonds, there are multiple factors supporting demand for gold and its price at present. 

Should equity markets experience a second wave of selling in the months to come, this would likely serve to act as a further catalyst for gold prices.
 
Seasonality a tailwind for gold in Q3

Gold is entering a seasonally positive period according to analysis of historical data which suggests third quarter returns are typically the strongest on record. This is demonstrated in the chart below, which shows the average monthly return of gold priced in USD for each calendar month. 
 

Source: The Perth Mint, Reuters 

Whilst historical performance patterns do not guarantee that prices will not fall in the coming quarter, the data does suggest that a continued increase in the USD gold price would not be unusual.

Jordan Eliseo
Manager Listed Products and Investment Research 
The Perth Mint
6 July 2020

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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How big is the global gold market?

Topics [ GoldPass ]

According to the World Gold Council, the best estimates suggest that by the end of 2019 more than 197,000 tonnes of gold had been mined across the course of human history. 

Despite the fact that gold has been valued and sought after by humans for millennia, the majority of this gold – roughly two thirds – has been mined in the past 70 years.

This gold is owned in a variety of forms which can be grouped into several major categories of gold demand. These include:

Jewellery
Physical bars and coins
Exchange Traded Fund (ETF) holdings 
Official holdings (central bank reserves) 
Fabrication (industrial demand)

These are highlighted in the chart below which indicates the percentage of total gold holdings held in each:

Source: World Gold Council, based on end 2019 data

The table below shows total global gold holdings held in the above categories by percentage, actual tonnes held and market value based on the 31 December 2019 LBMA AM gold price of USD 1,523.00 per ounce. 


Source: World Gold Council, Kitco, The Perth Mint

As demonstrated by the above data, the size of the gold market at the end of last year, based on the amount that has been mined and its end-December 2019 price, was more than USD 9.6 trillion. 

Whilst not all these holdings can be considered ‘near market’ gold (particularly gold that has been used in fabrication), even the gold held for private investment and as central bank reserves has a market value in excess of USD 3.7 trillion. 

Note that the above table does not include exposure through derivatives (either exchange traded or over the counter), with the World Gold Council estimating that by the end of 2018 some USD 400 billion in exposure was held through these investments. 

At over USD 9.5 trillion, the gold market is valued at more than five times the size of the entire Australian superannuation market as at the end of 2019. 

To put the size of the global gold market in further perspective, in the chart below we compare it to some of the largest sovereign bond markets in the world as measured by the Bank for International Settlement (BIS) general government debt securities outstanding.
 
We highlight the gold market in two ways. The column titled ‘GOLD’ shows the size of the entire gold market, including jewellery and gold that has been used for industrial purposes. 

We also focus on what we term monetary and investment gold, which is the metal held by private investors in bar, coin and ETF form, as well as official reserve holdings by central banks. This is noted as ‘INVESTMENT GOLD’ in the chart. 


Source: World Gold Council; BIS total credit statistics, end Q2 2019, The Perth Mint

As you can see, if gold were a sovereign bond market, it would either be the second or third largest on earth, depending on which way you chose to measure it. 

It is of course also worth noting that unlike the size of the government debt markets highlighted in the chart above, gold has no credit risk or long-term inflation risk. 

The issues surrounding risk in sovereign debt markets is something that the World Gold Council has also commented on. In a report titled Liquidity in the global gold market, it noted that “ever increasing debt markets driven by consistent fiscal deficits may benefit market participants from the perspective of market size; however, ultimately this also increases credit risk of the underlying bonds.”

The huge size of the gold market, the stability of the total gold supply and its total absence of credit or long-term inflation risk only add to the asset’s attractiveness as an investment. 

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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