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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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Silver outperforming as metals continue to rise in US dollars

Silver outperformed gold by 13.7% in May 2020. That’s a bullish sign for precious metal investors. 

Executive summary

• Gold and silver prices continued to rise in May, increasing by 1.02% and 14.70% respectively.

• The strong rally in silver saw the Gold to Silver ratio (GSR) fall back below 100.

• The Australian dollar (AUD) rallied by 1.40% vs the US dollar (USD) price. Gold closed the month below AUD 2,600 per ounce. 

• Investments into physical gold and ETF inflows remained strong, continuing a period of elevated demand.

Full monthly review – May 2020 

May 2020 was another positive month for precious metal investors, with gold rising by more than 1% in US dollar terms to finish the month trading at USD 1,728 per ounce. Silver had an even better month, increasing by nearly 15% in its largest monthly gain in almost four years to finish the month above USD 17.50 per ounce. 

The increase in precious metals occurred despite the continued rise in equity markets, with the S&P500 increasing by 4.53% in May 2020 to close the month back above 3,000 points. 

In this market update, we provide an overview of four trends for precious metal investors to follow:

• Silver’s recent outperformance relative to gold
• The rally in the Australian dollar
• Inflows into gold ETFs 
• Bond market warning signals for investors 

Silver is outperforming gold

Silver prices have continued to rise from the lows seen in March 2020, with the metal up almost 50% in the past two months. Whilst still lagging gold on a calendar year-to-date basis, the performance gap between the two metals has narrowed substantially.

This is reflected in a falling Gold to Silver ratio (GSR), which declined from a high of just over 120 in late March to 98 by the end of last month, a drop of almost 20%. 

Silver typically outperforms gold to the upside and underperforms gold to the downside. As such, the strong rally in silver since late March is a positive sign for precious metal bulls, suggesting there may be further upside for both metals in the weeks and months to come. 

Gold itself looks well supported, though we note it has fallen below USD 1,700 in the first few trading days of June. 

How high will the Australian dollar go?

In late March the Australian dollar fell to USD 0.557, having declined from its end-2019 reading of USD 0.700. From that low, the currency rebounded approximately 20% to end May 2020 at USD 0.665.  

The currency rebound has been driven by multiple factors including strong iron ore prices, the bounce in equity markets and growing investor optimism as governments outline a path out of the COVID-19 lockdown. General weakness in the US dollar, which has declined by roughly 5% against a basket of currencies since late March, has also contributed. 

The rally in Australian dollars has meant that gold prices in local currency terms has stagnated since late March 2020, though it did at one point trade above AUD 2,700 per ounce. Whilst this may frustrate existing investors, the pullback provides a better potential entry point for those looking to increase their exposure to gold.

Indeed in the first few days of June we’ve seen further upside in the Australian dollar, with the currency pushing up beyond USD 0.69. This has put downside pressure on the local price of gold, which is now trading below the AUD 2,500 level.  

Beyond this, we would not be surprised to see this Australian dollar rally stagnate, with downside risk in the months to come. Westpac Bank has a ‘fair value’ model for the Australian dollar which suggests the currency should be trading at USD 0.625. 

Were the currency to fall to this level, it would boost the Australian dollar gold price back above AUD 2,750 given an increase of approximately 5% from current levels. 

ETF demand is still strong

Whilst most clients at The Perth Mint prefer to buy their precious metals in physical form, gold ETFs are important to watch, as flows into and out of these products tend to be highly correlated to gold prices.
 
In May 2020, gold ETFs had another strong month of inflows, with more than 100 tonnes of metal being purchased through these products in the three weeks to 22 May (end May data is not yet available). 

Year to date, holdings have risen by 602 tonnes, making 2020 the second strongest calendar year on record for gold ETF demand, even though we are only five months into the year. 

The Perth Mint was again part of this trend, with holdings in its ASX-listed product, Perth Mint Gold (ASX:PMGOLD), rising by almost 4% in May. The product is now backed by more than 6 tonnes of gold and has a market value in excess of AUD 500 million. 

The bond market doesn’t trust the stock market rally 


One interesting development which precious metal investors should pay attention to is the movement, or lack thereof, in US government bond yields since the late March low in equity markets. 

Bond yields have barely budged in the past two months, despite the fact the S&P 500 has had one of its strongest rallies on record over this time period, gaining by more than 30% and reclaiming the 3,000 point mark at the end of last month. 

These performance trends can be seen in the chart below, which highlights US 10-year government bond yields (gold line) and the S&P 500 (red line) on a daily basis across the first five months of 2020.


  
Source: The Perth Mint, US Treasury, investing.com, yahoo finance

In the first three months of the year, equity prices crashed and bond yields fell (ie. bond prices rose) as fears over the spread of COVID-19 spurred investors to dump risky assets in favour of perceived safe havens. 

Across Q1 2020, the US 10-year government bond yield declined from 1.91% to 0.70%, something most market observers would see as natural occurrence given the unprecedented circumstances. 

What is more interesting is the fact that bond yields have not risen during the aforementioned equity market rally from late March onwards. If investors really were 100% convinced that we will find a smooth path out from the COVID-19 crisis, then one would have expected bond yields to increase (ie. prices to fall) over the past two months. Many would also argue that an equity rally of this speed and magnitude should have seen gold fall. 

However, bond yields have remained essentially flat whilst gold prices have risen by almost 20% since late March. This is a telling sign that investors are still concerned about the outlook for economic growth, the risk in equity markets or the potential for higher official inflation to rear its ugly head. 

Should any of those outcomes occur, it will provide ongoing support for precious metal markets. 


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




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Chart of the month: Bond yields and foreign exchange rates

Topics [ GoldPass ]

Bond yields and foreign exchange (FX) rates are important market drivers of precious metal prices and the returns investors can generate on these investments. 

In this blog post, we are going to look at movements in US and Australian 10-year government bond yields and in the AUDUSD FX rate across the past decade and how they are relevant to gold.

The below chart shows the movements in US (red line) and Australian government (black line) 10-year bond yields from 1999 to 2019.   


 Source: The Perth Mint, Reuters

As you can see, yields have fallen significantly, and are now 88% lower in Australia and 90% lower in the US relative to where they were in 1999. Most of these declines were experienced in the years after the Global Financial Crisis (GFC) hit. 

This fall in bond yields has been one of the factors that has driven the gold price from under USD 300 to more than USD 1,700 per ounce over this time period. Decreasing yields reduce the opportunity cost of investing in gold as the future returns investors can generate from bonds decline when yields fall. 

The second chart looks at both bond yields again, but instead of plotting them individually, it shows the differential, or the spread, between the two. This is the black line on the chart. The chart also displays movements in the AUDUSD over the same time period. 


 Source: The Perth Mint, Reuters

Note the correlation between fluctuations in the yield spread and the AUDUSD FX rate.  

Whenever the black line is rising, it means that the spread between 10-year yields in Australia and the US is growing (meaning bond yields in Australia are getting higher relative to those in the US). This has tended to correlate with a rising Australian dollar. 

Whenever the spread declines (meaning bond yields in Australia are getting closer to those in the US), you tend to see downward pressure on the FX rate, with the AUDUSD falling.
 
The chart displays two key trends over the past 20 years.

From 1999 to 2011 the bond spread increased as the gap between the yield on Australian government bonds relative to the yield available on US government bonds grew. The Australian dollar appreciated alongside this lift in spreads, rising from USD 0.64 in early 2000 to USD 1.10 by 2011.

Since 2011, bond spreads have declined from almost 3% to barely zero today. The Australian dollar has been in a downwards trend in comparison to the US dollar over this time period and is now back at almost the same level it was at the turn of the century.  

Indeed, at one point in early 2018, the spread between Australian and US 10-year government bonds went negative, meaning you earned more by lending to Washington rather than Canberra. 

From an Australian investor perspective there are two key takeaways.

The first is that very low bond yields (in both countries) are likely to be a feature of the financial landscape for a long time given that even 30-year bonds are yielding less than 1.50%. This is likely to support gold demand for years to come. 
 
The second relates to the AUDUSD exchange rate. If it were to follow the spread in yields going forward, then we could see further downside in our local currency as it continues to look expensive based on this metric. Whilst there are no guarantees, were this to happen, it would boost the Australian dollar price of gold. 

From a risk management perspective, many of the Australian investors we deal with at The Perth Mint are happy to have their exposure to gold unhedged in Australian dollars. This is because they see it as currency diversification for their overall wealth, given they typically earn their income in Australian dollars and have exposure to Australian real estate, shares and cash in their portfolio. 


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