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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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Perth Mint app gives US investors the golden touch

Topics [ buy gold online GoldPass ]

One of the world’s largest precious metals enterprises, The Perth Mint, has introduced its acclaimed smartphone app Goldpass to investors in the United States.

Part of its commitment to taking Australian gold to the world, the app allows investors to securely buy, sell and transfer Perth Mint gold in US dollars (USD) at the touch of a screen.

The secure investment platform, powered by InfiniGold technology, was launched in Australia in 2018 and has since amassed more than 17,000 registered users. 

Gold in the modern era

Gold, traditionally considered an asset favoured by seasoned investors with existing wealth, has moved firmly into the modern arena in recent years with developments in technology making it increasingly easier to access.

The ability to purchase physical gold though digital means with platforms such as GoldPass has made the precious metal more attractive to those beginning their wealth creation journey. 

Perth Mint Manager Listed Products and Investment Research Jordan Eliseo said during the past 12 months The Perth Mint has watched a distinct trend emerge as new and younger investors turn to gold, particularly when it is offered via digital products.

“We’ve certainly seen an increased appetite for gold among US investors, particularly in the current climate,” Mr Eliseo said. 

“What has become more apparent is the need for a broader range of gold products and platforms to meet the demands of contemporary investors.”

At the forefront of innovation for decades, The Perth Mint is an early adopter of cutting-edge technology that aims to bring gold to every investor – no matter their background or experience in investing.

“Technology is changing the way people invest and manage their wealth, with younger Australians leading the way in buying gold,” Mr Eliseo said. 

“Security and peace of mind still underpin investment decisions. However, immediacy, convenience and accessibility have become equally important, and GoldPass offers all these benefits.”

Providing a credible alternative to risker digital assets such as cryptocurrencies, GoldPass digital holdings will pave the way for gold to be used as an easy and convenient store of wealth and allow instant transfer to other GoldPass users.



How GoldPass works

GoldPass is ideal for anyone comfortable with digital technology who wants to invest in gold. Their holdings are doubly protected through the use of digital encryption and by the fact that their metal is held by a government-owned institution with a reputation of 121 years standing.

All digital certificates are 100% backed by physical Perth Mint gold stored in its network of central bank grade vaults. 

With no minimum investment, those just getting started with gold can easily buy and sell miniscule amounts as little as 0.001oz to build their confidence in gold as an asset and grow their wealth over time. 

An investor’s digital holdings, which reflect their gold balances in ounces, are visible in the app’s interface along with any deposited funds in the same way that balances are seen on an online banking system.

Using GoldPass, investors may buy Perth Mint gold and redeem their digital holdings or ounces for physical gold or cash at any time.

GoldPass is now available for free download for Android and iPhones on Google Play and the App Store.


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Dollar cost averaging: What is it and how does it relate to gold?

Topics [ gold market GoldPass invest in gold ]

There is a popular saying in financial circles that “you can’t time the markets”. This is the simple reality of investing in the modern age – and even truer in 2020 as the markets react to the unpredictability of a global pandemic.

One way to mitigate the risks of investing a large amount in a single investment or portfolio at the wrong time is a strategy known as dollar cost averaging.

A simple, flexible investment tool suitable for younger investors or those new to the market, it is especially worth considering during periods of volatility. Let’s examine why.

Cost per ounce

When investing in gold, it’s natural for investors to think in terms of cost per ounce. When the price of gold is down, many people decide to jump in by making a one-time investment. Then they wait for the price to go up.

While gold has been on a record-breaking upward trajectory for much of 2020, there is a natural fluctuation in pricing which has been demonstrated in recent months as the world adjusts to life with COVID-19. 

Dollar cost averaging, also known as the constant dollar plan, uses the moving price of gold to your advantage. Rather than making a single investment, you invest a fixed amount on a set schedule. 


Here’s an example of how it might work.

You have AUD 10,000 to invest. Using dollar cost averaging, you decide to invest AUD 1,000 per month in Stock A.

The first month Stock A sells for AUD 50 per share, so you buy 20 shares.

The second month it drops to AUD 25 per share, so the AUD 1,000 can purchase 40 shares.

The third month, Stock A has risen to AUD 40 per share, so you can grab 25 shares.

Now you own 85 shares of Stock A at the average price per share of AUD 35.29.

If you had spent the entire AUD 10,000 in a single up-front investment, you would have paid AUD 50 per share. By dollar cost averaging, after three months you only paid AUD 35.29 per share.

Why precious metals?

If investments only went up, this would not be an advisable way to invest - but in a volatile and unpredictable market environment dollar cost averaging has been proven to help reduce risk by averaging out market lows.

As a tool an investor can use to build savings and wealth over a long period, this strategy is especially applicable to long-term investments such as superannuation, mutual or index funds, and gold, which is traditionally held as a safe haven asset. 

It removes much of the detailed work of attempting to time the market in order to make purchases at the best prices. 

It is important to note that dollar cost averaging works on the assumption that prices will, eventually, always rise. 

While it has been established that this strategy can improve the performance of an investment over time, this is only if that investment increases in price across the period in question. The strategy cannot protect the investor against the risk of declining market prices. 

With gold’s performance over the past 20 years resulting in an annual average gain of more than 8%, there is little wonder why it is a common strategy for precious metal investors. 

When can you use it?

Although it's one of the more basic techniques, it is known to be one of the best strategies for investors looking to trade on a stock exchange via exchange-traded products such as Perth Mint Gold (PMGOLD).

Ideal for people looking to save, our Depository Online service can easily adapt to a dollar cost averaging approach with the option of scheduling an investment of as little as AUD 50 each month and 24/7 access.

For those new to gold who prefer to invest via their smartphone, digital platforms such as GoldPass may also lend itself to such a strategy. With no minimum investment, it’s easy to get started and test out your dollar cost averaging plan.

Had success with dollar cost averaging? Let us know why it works for you in the comments below.

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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Gold during the GFC vs COVID-19: Is it really just a repeat performance?

Topics [ market analysis financial crisis silver investing gold market gold investment GoldPass silver market ]

Gold prices have continued their positive market run in Q2 2020, with the yellow metal trading above USD 1,700 per troy ounce.

The spread of COVID-19 and the economic fallout from steps taken to contain it have been major drivers of gold’s upward move as risk-conscious investors take steps to diversify their portfolios.

The last time the market experienced such huge global economic impact was during the 2008 Global Financial Crisis (GFC) when gold’s upward trajectory seemed to mirror what we’ve seen so far in 2020. 

This has led to speculation that gold’s current behaviour is essentially a repeat of its performance during the GFC. 

While there are certainly similarities between the gold market during both crises, there are also significant differences.

We explore these below.

Key similarities between COVID-19 and the GFC

1. Gold price movements 

Gold prices were strong leading into the GFC, suffered a correction as a liquidity crunch saw investors desperate to raise cash, and then rebounded. 

A similar dynamic is at play today. Gold prices shot higher after a dip in March 2020, down from record highs as the crisis escalated around the world. 

2. Demand for the precious metal

There is no denying a surge in demand for gold in recent months, with The Perth Mint recording its highest ever month for sales in April 2020. 

Sales also peaked during the GFC, with General Manager Minted Products, Neil Vance, commenting to The Canberra Times that “we have seen sales in the last two months that we haven’t seen since the Global Financial Crisis in 2008 and 2009.” 

3. Managed money activity 


Managed money, a means of investment whereby investors rely on the decisions of professional investment managers rather than their own, has seen a similar movement in activity during the two crises.

Managed money long positions rose from around 65,000 contracts to more than 200,000 contracts at the beginning of the GFC. Following the announcement of quantitative easing (QE) packages they dropped to below 63,000 before increasing over the subsequent 12 months to more than 225,000 contracts as spectators helped push the gold price up by more than 45%. 

Ahead of the global economic shutdown caused by COVID-19, managed money long positions rose strongly from just 80,000 contracts in November 2018 to almost 280,000 by late February 2020. Over the past three months they have again been pared back, dropping to just over 140,000 by 12 May 2020. 

4. Equity valuations

The Shiller CAPE price-to-earnings ratio shows that equities peaked at a price earnings multiple of around 30 in 2007.
 
Today, despite the sharp sell-off seen during the first quarter of 2020, the latest estimates suggest multiples are still sitting around 30. This is roughly the same valuation point seen before the more than 50% decline in equities during the GFC. 

History demonstrated that investors who hedged against the risk of a sharply falling equity market during the GFC strongly outperformed those who didn’t. 

There are no guarantees as to what the future holds, but there seems little reason to think those hedges are not needed in today’s COVID-19 environment. 

Differences between COVID-19 and the GFC

1. Health crisis complicates path forward

The nature of the COVID-19 threat itself indicates the potential for a different market outcome for gold to that seen in the aftermath of the GFC.

The GFC was a result of capital misallocation, excessive debt and over-reliance on the financial system itself. 

Challenging though it was, there was no public health threat complicating the policy response or the path out of the crisis. 

The as-yet unresolved health hazard has forced a policy response which has led to the economic fallout - but there is no way to legislate or print a vaccine into existence. There’s no denying the road forward is significantly more uncertain. 

2. Debt levels 

Total levels of debt, specially government debt, is another major difference. According to an April 2020 update from the Institute of International Finance (IIF), global debt levels have now topped USD 255 trillion and are sitting at more than 322% of GDP. 

That is some 40% higher than when the GFC hit. 

There’s no doubt public balance sheets are in a more overextended starting position today relative to a decade ago. 

3. Lower yields 

Yields are much lower now relative to the GFC. 

Across 2007 and 2008, US 10-year treasury yields averaged 4.10%. On 15 May 2020 the US 10-year yield was sitting at just 0.64%, a decline of almost 85%.

Cash rates, too, are the lowest they’ve ever been. Even during the worst of the GFC, the cash rate in Australia never dropped below 3%. Today’s cash rate is 0.25% and implied yields suggest there will be more easing to come. In the US, markets are now pricing in the arrival of negative interest rates by early 2021. 

At a portfolio level, the negative real yields on cash and vast swathes of the sovereign debt market combined with richly priced equity markets means prospective returns for diversified investors are far lower today than they’ve been in the past. 

This backdrop, combined with the fact that the opportunity cost of investing in gold is significantly lower in 2020 relative to the GFC environment, suggests gold should be well supported for some time to come. 

4. Monetary and fiscal policy more expansive

The fiscal response to COVID-19 is dwarfing what was deployed during the GFC. 

According to the statistics in this article, the fiscal deficit of all the nations highlighted (when weighted by each nation’s 2009 output) was 4.34% of GDP. The same measurement gives us a projected fiscal deficit of 7.34% of GDP in response to COVID-19. 

Government attitude to emergency monetary policy has also differed, with QE packages and zero interest rate policy (ZIRP) now standard elements of the monetary policy response kit. During the GFC, these stimuli were treated as extreme measures, to be used with caution and removed as quickly as possible.

Indeed, in the aftermath of the GFC, it took almost seven years for The Federal Reserve balance sheet to grow by USD 3.5 trillion to a pre-COVID-19 high of USD 4.52 trillion. This time around The Federal Reserve has added more than USD 3 trillion to its balance sheet in just over three months. 

5. Supply chain issues and trade uncertainty

Trade tensions and supply chain issues playing out in what may well prove to be a fragile geopolitical environment in the years ahead are another important distinction between the COVID-19 crisis and the GFC. 

In time, this will flow through to either lower company profits, higher inflation, or a combination of the two. These trends can be expected to support gold demand going forward. 

6. Commodity prices are much cheaper

Leading into the GFC, commodity prices were high, having outperformed stock prices for most of the early 2000s. The situation today couldn’t be more different. 

Even before COVID-19 hit, commodity prices were at the lower end of their historical range, having fallen approximately 75% from their record levels seen a decade earlier. 

Relative to stocks, they have never been cheaper. The S&P Goldman Sachs Commodity Index to S&P 500 ratio are comfortably below 1 today. When the GFC hit the ratio was more than 8, as shown in the chart below. 

 
Source: The Perth Mint, Reuters, au.investing.com 

Any investor who believes in ‘mean reversion’ will look at a chart like this and be encouraged by the potential for commodities to outperform in the decade ahead. 

7. Social impacts

Most investors are at least somewhat concerned at what the ‘post’ GFC world looks like, given it is characterised by ever-widening wealth inequality and political fragmentation.

COVID-19 has shone an even harsher light on the gap between the haves and the have-nots. This unease has fed higher gold demand. 

Summary

There are broad similarities in the performance trajectory of gold through both the GFC and COVID-19 crises and the market response in terms of demand for the precious metal.

However the differences in the macroeconomic, market and monetary sphere suggest wider implications for the asset’s future movements. 

The result is that the path toward economic recovery and the outlook for diversified investors is significantly more challenging today than it was just over a decade ago. 

This suggests that the outlook for gold is even more positive today, with demand likely to be more sustained as we navigate the uncharted territory of COVID-19. 

The article above was adapted from a more detailed analysis by The Perth Mint titled Gold: GFC vs COVID-19 and the inflation myth which was recently published on Livewire. For an in-depth study of the factors impacting gold during COVID-19 and the GFC, read it now.

The Perth Mint offers a range of precious metals storage solutions for investors who want the convenience and security of offshore storage. For further information please see perthmint.com/storage/


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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