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

Topics [ gold market 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 during the GFC vs COVID-19: Is it really just a repeat performance?

Topics [ market analysis financial crisis silver investing gold market gold investment 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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Demand for Kangaroo bullion coins surge as new decade dawns

Topics [ Australian Kangaroo silver bullion coins gold market gold bullion coins ]

The Perth Mint experienced an increase in demand for its signature gold bullion coin, the 1oz Australian Kangaroo, in the latter half of 2019 as investors turned to precious metals in the face of an uncertain 2020. 

Sales of the 1oz gold Kangaroo coin in Australia more than doubled in the six months ending December 2019, rising 63% against the same period in 2018. 

Silver purchases also spiked with more than four million 1oz Australian Kangaroo silver bullion coins sold to investors in Australia, Europe and Asia resulting in a 36% increase in overall sales year-on-year. 

Group Manager, Minted Products Neil Vance said political unease and a struggling retail sector reflected in record low interest rates around the world helped the case for precious metals as investors sought to preserve wealth. 

“Precious metal markets were certainly in the spotlight in 2019 with the price of gold reaching record highs in Australian dollar terms in the latter half of the year as investors sought to hedge against falling markets,” Mr Vance said.

“Our bullion coins have been a popular choice for decades and the rise in demand for both our 1oz silver and gold Kangaroo bullion coins prove that these signature offerings continue to provide investors with trusted quality and value as a leading global investment choice.”

The notable rise in gold purchase has been seen across The Perth Mint’s range of investment options, from physical bullion coins and bars to digital gold via exchange-listed gold products and an innovative digital app. 

With uncertainty about the future of the world economy and escalating tension between the US and Iran, it seems the case for gold remains strong at the dawn of 2020.



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Who owns the world's gold?

Topics [ gold market gold analysis gold trading gold ]

USD 9.3 trillion: That’s the estimated market value of all the gold ever mined, just over 190,000 tonnes, based on an end of August 2019 gold price of USD 1,528.40 per troy ounce.
(Source: LBMA PM Gold Price

The owners of this gold fall into four broad categories:

Jewellery Buyers - This is the largest category of demand, accounting for almost 50% of gold ownership. Jewellery demand is predominantly driven by rising real incomes in Asia and the Middle East, where gold is seen as a form of wearable wealth.

Central Banks - Central banks own gold as part of their foreign exchange reserves. Collectively, central banks around the world own more than 30,000 tonnes of gold.

Investors - Investors buy gold in physical bar and coin form, as well as through depository services, such as those offered by The Perth Mint, and via Exchange Traded Products. It is estimated that in excess of 40,000 tonnes of gold are held by private investors worldwide.

Industrial Users - Gold is used in a range of industries from medicine and electronics to space technology. Industrial users are estimated to own more than 25,000 tonnes of gold.



Who buys gold now?

The annual GFMS Gold Survey offers a great insight into gold demand trends. In 2018, purchases of gold were as follows:

  • Jewellery demand was 2,129 tonnes
  • Bar and coin demand was 1024 tonnes
  • Central banks made net purchases of 536 tonnes
  • Industrial fabricators purchased 391 tonnes
  • Net flows into gold ETFs totalled 59 tonnes


Demand across the first eight months of 2019 has been driven by central banks, which continue to diversify away from the US dollar. This trend was perhaps best summarised by an August 27 Bloomberg article, Central Banks Just Love Gold and It’s Going to Stay That Way. The article focused on a report by Australian and New Zealand Banking Group (ANZ) which estimates net buying of gold by central banks will be more than 650 tonnes this year.

There is also increasing demand for gold ETFs which have built total holdings back towards 2013 levels.



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Why do investors turn to gold in low interest rate environments?

Topics [ gold market buy gold ]

Much of the developed world, including Australia, has experienced low interest rates since 2009 when monetary authorities introduced cuts to stimulate economic growth following the global financial crisis. 

In Australia, interest rates reached a record low this year when the reserve bank reduced its cash rate to just 1.00% in July. 

The decision to leave this rate unchanged in August and September on the back of continued uncertainty about the world economy has suggested interest rates will remain low for the foreseeable future.

Indeed, market predictors expect the Reserve Bank of Australia (RBA) to cut rates further to just 0.75% before the end of 2019.

What does this mean for investors?

In today’s low interest rate environment one of the most topical issues for many investors is what to do with their cash holdings. 

With 56% of Australian investors holding cash, according to Australian Tax Office data, this issue will have been brought into sharp focus for many. 

Given the latest set of Australian inflation data suggests prices across the nation are rising at 1.60% per annum, much of the money sitting in cash is losing value once real interest rates are considered. 

Real cash rates are calculated by subtracting the official inflation figure from the RBA cash rate. As an example, with the RBA cash rate at 1%, and annual inflation currently at 1.60% per annum, the real cash rate is -0.6%. 

Moreover, the fact that 10 to 15-year Australian government bonds yield between 1.25% and 1.50% suggests this period of low returns on cash or cash-like assets may well continue for another decade or more. 

In such an environment many investors are considering gold as a safe haven thanks to the asset’s historical outperformance when interest rates are low. 

Real cash rates and gold

More than 45 years of market history tells us gold has typically delivered strong returns when real rates have been low. 

In Australia between 1971 and 2018 there have been 27 years when real cash rates were 2% or higher and 21 years when they were 2% or lower. 

The table below highlights the returns on cash and gold, in both nominal and real terms, during these periods. 

Real cash rates between 1971 and 2018




Source: The Perth Mint, Australian Bureau of Statistics 

As can be seen, in environments where the real cash rate was above 2%, gold rose in nominal terms by an average of 4.32%. It therefore underperformed cash, which during these times rose by an average of more than 9%. 

However, in years when the real cash rate was below 2%, the price of gold rose by more than 20% in nominal terms and by almost 14% in real terms. Additionally, it rose during 18 of the 21 years when the real cash rate was below 2%. 

Gold has not only performed strongly in absolute terms when real cash rates have been low, but on a relative basis as well. The yellow metal outperformed both stocks and bonds during the years when real cash rates were below 2%. 

This can be seen in the graph below, which plots the nominal and real returns for Australian stocks, bonds and gold during years when real cash rates were below 2%. 

Australian asset class returns when real rates are below 2%



Source: The Perth Mint, Australian Bureau of Statistics

It should be no surprise that gold would perform so well during periods when real cash rates have been low for two key reasons: 

1. Low or even negative real cash rates are typically only implemented as a form of monetary stimulus when the economy is weak or softening. In such environments it’s natural that investors adopt a more defensive approach by seeking out safe haven assets such as gold. 

2. If the real rates one can earn from cash or short-term bonds are low, or even negative, the opportunity cost of investing in gold is significantly reduced.

It therefore makes sense that historically no other single, easily accessible traditional asset has delivered higher returns than gold in environments where real cash interest rates have been low. 


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The centenary of the first London gold price

Topics [ gold market investment buy gold ]

12 September 2019 marks the centenary of the first gold price, or what is now known as the LBMA Gold Price. To mark this momentous occasion LBMA are planning a series of celebratory events during 2019. This article first appeared in Alchemist magazine as the first of four from Alered Connelly, PR Officer at LBMA, which draw on his academic analysis of the gold price over the last 100 years.

A brief history

On 12 September 1919, the Bank of England made arrangements with NM Rothschild & Sons for the formation of a free gold market and the establishment of a daily gold price. 

The first “fixing” took place at 11am when the price of gold was settled at £4 18 s 9d by the five founding members: NM Rothschild & Sons (chair), Mocatta & Goldsmid, Pixley & Abell, Samuel Montagu & Co. and Sharps Wilkins. The bids were made by telephone for the first few days, but it was then decided to hold a formal meeting at New Court, the London offices of NM Rothschild & Sons. 

The original members of the Fixing were all historically linked with the gold market in London. Mocatta & Goldsmid dated back to the early origins of the market in the late 1600s, when it became silver broker to the Bank of England, at a time when London was usurping Amsterdam as the international centre for the gold market. 

In the late 18th century and early 19th century, Mayer Amschel Rothschild rose to become one of Europe’s most powerful bankers and it was his third son, Nathan Mayer Rothschild, who founded NM Rothschild & Sons in London in 1811. As gold began to pour into London from the gold rushes, first from California and then Australia, Pixley & Abell was set up in 1852, swiftly followed by Samuel Montagu in 1853. 

In the intervening years, mergers have seen Pixley & Abell and Sharps & Wilkins in 1957 form Sharps Pixley, which is still in existence to this day, and Samuel Montagu become part of the private banking service of HSBC. 

As we reflect on the last 100 years of the gold price, we equally look forward to the next 100 years. Today, it continues to be set in London and remains the international benchmark price for the gold market. However, over the years it has evolved and modernised. One of the most significant changes was on 1 April, 1968 when the price changed from sterling to dollars and took place twice a day. 


More recently in 2015 responsibility for the administration and governance of the price was transferred to an independent administrator, ICE Benchmark Administration who have also established an external oversight committee to assist them in ensuring the effective governance of what is a transparent, trusted and tradable process. 

The auction provides the opportunity to buy or sell precious metals via a transparent electronic platform. Everyone can see the same, publicly available information at the same time - providing a level playing field to all participants. The administrator monitors the benchmark settings before during and after the process to ensure its integrity. 

The tradable reference price is used by miners, refiners, central banks, investors, traders and fabricators around the globe. The auction is centrally cleared which allows a broad range of firms to become Direct Participants. Currently there are now 13 direct participants rather than just the original five, including Chinese banks. 




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