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Why invest in gold?

Topics [ gold minted bars gold investing gold bull market gold investment ]

Many investors are averse to gold because, as Warren Buffet argues, it’s an unproductive asset. Whereas equities and property are useful and provide a return, gold “doesn’t do anything but sit there”. Consequently, it has little inherent value from his point of view.

So why do some people ignore the advice of the world’s most famous investor and buy gold? In short, they believe it has a valuable role to play in protecting their wealth. How is this so and how can Australian Securities Exchange (ASX) investors take advantage?

Over time, gold is considered to hold its value in real terms. According to the old adage, throughout history an ounce of gold has always bought a man’s quality suit. The World Gold Council illustrates the point with a similar analogy. Back in 1971, USD 25,000 – the equivalent of 700 ounces of gold – was enough to purchase a family house. That amount of cash today would hardly pay for a mortgage deposit, whereas 700 ounces of gold, worth approximately USD 875,000, is still enough to get a foot on the property ladder.

The Perth Mint Gold Cast Bars

Professor Roy Jastram provided statistical evidence of gold’s ability to provide a hedge against inflation in his seminal work, The Golden Constant. His detailed examination of the English and American financial systems between 1560 and 2007 concluded that despite some severe fluctuations, gold has held its value over the centuries, offering an effective means of protecting wealth.

While it would be unwise for any investor to invest solely in gold, it is worth considering the shiny yellow metal for portfolio diversification. Thanks to its ‘safe haven’ characteristics, gold tends to have a low correlation to ‘risk’ assets – that is it tends to go up in value when other asset classes go down. In this way, it can play an effective role in mitigating overall losses during the downside of the business cycle.

History shows that in extreme circumstances, many investors join a ‘flight to quality’. As we saw in 2008 – 2009, when confidence in the global financial system was severely tested, many sold out of what they perceived to be higher risk investments and piled heavily into gold. The subsequent spike in price to more than USD 1,900 per ounce proved to be a great strategy in preserving portfolios values.

Advisors who support the role of gold in a portfolio generally recommend an allocation of somewhere between 5% and 10% to provide ‘insurance’ against similar crashes.

Today, the argument for an allocation to gold is strengthened by uncertainty on several macroeconomic and geopolitical fronts. Commentators see significant risk in the underlying strength of the Chinese economy, protectionist trade policies, Brexit and the forthcoming Euro elections, as well as emerging tensions in the Korean peninsula and the Middle-East region. So called ‘black swan’ events, any unforeseen development with the power to shock markets, remain an ever present possibility.

Fortunately, gold is no longer the preserve of institutions or wealthy private investors. It’s readily accessible in the form of retail bullion bars and coins to Exchange Traded Funds. Servicing clients from ‘mum & dad’ investors, through to Self-Managed Super Funds, institutional and sovereign buyers, The Perth Mint offers a range of different ways to gain exposure to gold – including a wide choice of physical products for delivery or safe storage, certificates, and a product designed specifically for anyone preferring to trade via the ASX.

Perth Mint Gold (PMG) is a warrant providing a right to 1/100th of a troy ounce of gold created by the Mint. Traded on the ASX under the code PMGOLD, its price closely tracks the international over-the-counter market spot price of gold in Australian dollars. While not the only warrant available to investors who prefer to hold gold within their stockbroking account, it does offer an exclusive and invaluable set of reassurances – not least The Perth Mint’s status as a global leader in precious metals.

Established in 1899 to refine Australian gold and to make sovereigns, today’s modern Mint operates across the precious metals value chain, including refining, manufacturing, investing and storage.

As the operator of Australia’s only gold and silver refinery accredited by the London Bullion Market Association (LBMA), clients are assured of the stated weight, purity, and integrity of its gold, silver and platinum products.

During the past 30 years, the Mint has made almost 51 million bullion and numismatic coins, which have the reputation for being among the highest quality coins in the world. In the process, it has added value to nearly 270 tonnes of gold and more than 3,000 tonnes of silver.

Also offering secure storage for investors who prefer not to take physical delivery, its depository currently manages precious metal valued at more than AUD 3.11 billion on behalf of more than 30,000 clients worldwide.

Accounting for a further 2.2 tonnes (at the time of writing) of client gold held on the Mint’s secure premises, PMG is the only ASX gold product which can be redeemed for physical Perth Mint bullion coins or bars, while the option to take delivery can be exercised at any time. But it is the fact that PMG is physically backed and fully West Australian government guaranteed that truly sets it apart.

As with its certificate and depository investment solutions, The Perth Mint backs every ounce of PMG gold it sells on a 1:1 basis with physical metal – ensuring that all metal held on its clients’ behalf is 100% backed. As an institution subject to rigorous corporate governance and control, this undertaking is critical to the Mint’s exemplary reputation.

Investors can also have complete confidence in the Mint’s ability to deliver from the fact that since 1971 it has been wholly owned by the government of Australia’s largest resource rich state, which guarantees its liabilities - including obligations under the PMG Terms and Conditions. Enshrined in the Western Australian Gold Corporation Act 1987, under which the Mint’s operator Gold Corporation was created, Section 22 states:

“The payment of the cash equivalent of gold due, payable and deliverable by Gold Corporation ...  is guaranteed by the Treasurer, in the name and on behalf of the Crown in right of the State." 

The Perth Mint’s government guarantee is unique in the world, offering all investors an unprecedented level of security. Consequently, for those seeking gold with the same ease and convenience of trading in shares, together with one of the lowest management fees associated with any gold exchange traded product, The Perth Mint’s PMG could be the perfect answer.

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