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Warning sign suggests now may be the time for gold!

Topics [ gold market gold analysis gold investment ]

Key Points

 • History suggests we are at a point in the market cycle from which gold will outperform stocks in the coming years.

 • Gold’s outperformance relative to stocks has averaged over 50% in the five years following previous yield curve inversions.

 • Nominal returns on cash and bonds, as well as inflation rates, are lower today than recorded levels at previous yield curve inversions.

 • Equity valuations are higher today compared to all previous yield curve inversions except for February 2000.


Global bond markets dominated the attention of investors and financial market commentators last week, with yields on some developed market government bonds falling to record lows. In Australia, 10 year government bonds dropped to all time record lows around 1.75% at one point.

Attention has particularly focused on the US, where the yield curve has inverted for the first time in more than a decade. The last time this phenomenon occurred was just before the start of the Global Financial Crisis (GFC).

What does yield curve inversion mean?

For those unfamiliar with the phrase ’yield curve inversion’, it is simply a circumstance where short term bonds, for example a two year government bond, have a higher return than a longer term bond, for example a 10 year government bond.

Note that yield curve inversion doesn’t have to refer to two year and 10 year bonds exclusively. Indeed right now it’s one year and 10 year bonds that have inverted.

Irrespective of which bonds you’re specifically referring too, typically you’d expect longer term bonds to have higher yields than shorter term bonds. There are a number of reasons for this including the need to compensate investors for taking on greater risks in a longer term loan, as well as them having a greater opportunity cost in terms of investment they’ll have to forego. This is because it will take longer for them to get their money back in a long term bond, relative to a short term bond.

As such, yield curve inversions do not occur all that frequently in financial markets, and when they do, they are typically seen as a bad omen in terms of what is likely to happen in the economy in the years that follow. As one market analyst, Jeffrey Halley, stated to Bloomberg earlier this week: “Bond markets globally, along with dovish central banks, have been telling us a slowdown is on the way.”

Yield curve inversions often, though not always, precede recessions, or outright falls in total economic output. This is why market analysts, economic commentators and policy makers are concerned with present day developments, and the inversion that is taking place today.

What has happened to markets in the past?

Over the past 40 years in the US there have been four previous periods where the yield curve has inverted, with a US two year government bond having a higher yield than a US 10 year government bond. These occurred in August 1978, a decade later in December 1988, again in February 2000, and most recently in December 2005 (please see end of article for our data sources and inversion methodology).

The chart below highlights what happened to the price of gold, and the price of the S&P 500*, in the one, three, and five year periods that followed those four previous yield curve inversions, with all returns expressed in percentages.

Note that the data in the chart below represents the average return across all four periods, with a more granular and highly detailed breakdown of the returns generated by gold and stocks following each individual yield curve inversion provided at the end of this article.

*The S&P 500 is widely regarded as the best single gauge of large cap US equities.

As you can see, on average, gold prices have strongly outperformed equities in the one, three and five year periods following on from previous yield curve inversions, with a positive performance differential that gets larger over time.

Over one year, the average performance of gold at just over 16% is almost double that of equities, whilst over three years, the average return for gold is more than 45% higher, with equities actually suffering a minor decline in value.

Extend the analysis out to five years and the average return of gold is more than 50% higher than equity markets historically delivered, with gold prices up almost 80%.

Were a similar scenario to play out in the years ahead, it would not be unreasonable to expect the gold price to be trading at almost USD 2,400 per oz by 2024, based on the gold price today, which is trading just below USD 1,300 per oz.

As the more granular data at the end of this article will highlight, the above chart doesn’t mean that gold outperformed each and every time the yield curve inverted, and indeed in the one, three and five years that followed the 1988 inversion, stocks turned out to be a more profitable place to invest than gold.

Is gold guaranteed to outperform?

In a word, no.

There is a good reason why fund managers and the like must disclose the fact that past performance is no guarantee of future returns, or results. Gold for one didn’t outperform in all prior periods of curve inversion, with the years following the 1988 yield curve inversion far kinder to stock markets than bullion investors.

There are also some obvious differences between the current scenario we are facing in markets, and historical periods where the curve inverted. Inflation for one is far lower today than the 1970s and 1980s, while central bank activity in the bond market over the last few years may have impacted the effectiveness of yield curve inversion as a recession risk warning.

While US, and indeed global growth rates are slowing, the US economy is still expanding, growing at an annualised rate of 2.6% in the last quarter of 2018 (the latest available data). We are likely some time away from a recession, should it eventuate at all.

Be that as it may the data presented above, and below in the more granular breakdown of each period below, is clear. If history is any guide, there is a good chance that gold bullion will outperform financial assets in the years ahead.

This argument is further supported not only by the rich valuations in stock markets today, but the very low real yields on offer in traditional defensive assets, including the almost USD 10 trillion in negative yielding sovereign debt.

At the very least, prudent investors will be looking at gold as a way of protecting capital in what may turn out to be a challenging period for the global economy and financial markets.

Until next time…

Jordan Eliseo

1978 yield curve inversion

The following chart highlights the one year, three year and five year performance for gold and the S&P 500 following on from the 1978 yield curve inversion. The table that accompanies it highlights nominal two and 10 year yields, the gold price, CPI, the Federal Funds rate, and “real” cash and bond rates. The table also shows both the price level of the S&P 500 and the cyclically adjusted price to earnings ratio (CAPE) for the S&P 500 as well, with these data points shown in the month the curve inverted, as well as in the two years preceding inversion, and the three years after.

Highlights:

 • Gold outperformed equities over one year, three years and five years following on from the 1978 inversion

 • Outperformance was most pronounced over three years, with a differential of almost 80%

 • While nominal cash and bond rates were high in the 1970s (above 8%), so was inflation, which was on its way from under 6% in 1976 to almost 12% by 1979

 • From a valuation perspective, equities remained “cheap” over this entire time period, with the CAPE ratio sitting between eight and 12.

1988 yield curve inversion

The following chart highlights the one year, three year and five year performance for gold and the S&P 500 following on from the 1988 yield curve inversion. The table that accompanies it highlights nominal two and 10 year yields, the gold price, CPI, the Federal Funds rate, and “real” cash and bond rates. The table also shows both the price level of the S&P 500 and the cyclically adjusted price to earnings ratio (CAPE) for the S&P 500 as well, with these data points shown in the month the curve inverted, as well as in the two years preceding inversion, and the three years after.

Highlights:

 • Gold underperformed equities over one year, three years and five years following on from the 1988 inversion

 • Underperformance was most pronounced over 5 years, with a differential of almost 70%

 • Nominal cash and bond rates were high in the late 1980s, whilst inflation was more subdued, with real yields of over 4%, whilst equities were re-rated higher in the aftermath of the 1988 inversion, with the CAPE ratio rising from 14.70 to 21.16 between 1988 and 1993

 • This more positive environment for financial assets helps in part to explains gold’s relatively poor performance in this time period

2000 yield curve inversion

The following chart highlights the one year, three year and five year performance for gold and the S&P 500 following on from the year 2000 yield curve inversion. The table that accompanies it highlights nominal two and 10 year yields, the gold price, CPI, the Federal Funds rate, and “real” cash and bond rates. The table also shows both the price level of the S&P 500 and the cyclically adjusted price to earnings ratio (CAPE) for the S&P 500 as well, with these data points shown in the month the curve inverted, as well as in the two years preceding inversion, and the three years after.

Highlights:

 • Gold and equities fell in the one year following the February 2000 yield curve inversion

 • Gold outperformed over three and five years, beating equities by 60% over both timeframes

 • Real cash and bond rates were still positive (2.5%-3% depending on duration), giving investors multiple defensive options for their portfolios

 • Equities were incredibly expensive heading into 2000, trading at over 40 times CAPE. This number fell dramatically in the five years that followed, helping to explain the poor results for the share market, and the strong returns delivered by gold

2005 yield curve inversion

The following chart highlights the one year, three year and five year performance for gold and the S&P 500 following on from the 2005 yield curve inversion. The table that accompanies it highlights nominal two and 10 year yields, the gold price, CPI, the Federal Funds rate, and “real” cash and bond rates. The table also shows both the price level of the S&P 500 and the cyclically adjusted price to earnings ratio (CAPE) for the S&P 500 as well, with these data points shown in the month the curve inverted, as well as in the two years preceding inversion and the three years after.

Highlights:

 • Gold strongly outperformed equities over one year, three years and five years following the 2005 inversion

 • The most pronounced outperformance occurred over five years, with gold up almost 175% whilst equities were largely flat

 • This outperformance was driven by a handful of factors, including the occurrence of negative real interest rates, and the Federal Reserve undertaking Quantitative Easing in the aftermath of the GFC, both of which limited the attractiveness of traditional defensive assets and buoyed gold demand

 • A sharp decline in equity valuations also contributed to the outperformance of gold

Notes on data and calculations

Where possible, we have used monthly data points for calculations included in this article, with much of that data sourced from Reuters. Inflation data was sourced from the St Louis Federal Reserve, whilst S&P 500 data (monthly prices and CAPE) was sourced from Robert Shiller/Yale, which is available for public download from here

The article and the charts and tables used within it are based on our classification of yield curve inversions as having occurred from the month end that two year yields first closed above 10 year yields, provided two year yields then remained above the 10 year yields for at least three months.

As an example, according to Reuters data, two year yields exceeded 10 year yields at the end of June 1978, but not in July 1978. By end August 1978, two year yields again exceeded 10 year yields, and did so until April 1980. Hence we use August 1978 as the starting point for that yield curve inversion.

Using daily or weekly data points, a different data source, or a different definition for yield curve inversion would generate different results to those we have published.

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 export triumph reflects Australian gold sector growth

Topics [ gold market gold bullion gold bars gold mining ]

The Perth Mint’s success in exporting AUD11 billion worth of gold to China in the past year reflects the increasing significance of the Australian gold sector.

There are currently 66 gold mines operating throughout the country, including 14 of the biggest in the world, according to this Channel 9 News report.

Eleven of those are in Western Australia, the nation’s biggest gold State, where four new mines are also currently under construction.

That adds up to employment for about 25,000 people, around double the number it was 10 years ago.

Processing virtually all of Australia’s newly mined gold, as well as supplies sourced from surrounding countries like New Zealand, PNG, Malaysia and Thailand, takes place at The Perth Mint refinery. As Perth Mint CEO Richards Hayes tells reporter Rebecca John, much of it is made into kilo bars for China, individually worth around AUD55,000 at current prices.



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Perth Mint CEO shines light on Australian gold exports in live business broadcast

Topics [ financial crisis gold market ]

It was a case of lights, camera, action at The Perth Mint this morning as leading figures from Western Australia’s business community gathered to report on the State’s economic fortunes live on Channel 9.

Among the guests joining Today Perth News host Tracy Vo was Richard Hayes, CEO of The Perth Mint, who was invited to discuss the current strength of demand for Australian gold.

Mr Hayes said that The Perth Mint, which refines more than 90% of Australia’s annual gold mine output, was currently experiencing strong demand from China, the world’s leading destination for Australian gold exports.

“To give you some idea how that has increased in recent times, in 2011 we exported about 100 tonnes of gold to China,” he said. “Last year we did 230 tonnes of gold to China.”

“Our export numbers are about AUD17 to 18 billion a year and last year AUD11 billion went to China,” he said.


Richard Hayes, CEO of The Perth Mint, with Channel 9 interviewer Tracy Vo during today's live broadcast.

Mr Hayes added that investment was also fuelling demand for gold. Historically, demand for gold has increased at times of international crisis and upheaval.

“As people are looking to diversify their asset portfolios… gold is increasingly a commodity in which they are storing a portion of their wealth.”

“If you look at the world today… at geo-political instability, China, Russia, North Korea, what’s happening in the Middle East, gold is and always has been that ultimate store of wealth,” he said.

Others taking part in Channel 9’s business special from The Perth Mint’s gold exhibition were REIWA’s Hayden Groves; property valuer Gavin Hegney; Andrew Tomich of Hudson Recruiting; financial planner David Sharpe; James McGlew from Argonaut Securities; and Phil Thick from Tianqi Lithium.



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Facts behind gold’s huge importance revealed

Topics [ gold market gold refining ]

It is a well told story that the discovery of gold helped transform 19th century colonial Australia into one of the most economically dynamic and socially diverse nations of the modern era.

Probably less well known is the fact that gold continues to play a fundamentally important role in the Australia’s fortunes, providing employment for thousands of people, particularly in regional communities, and generating wealth for the nation via taxes and royalties.

Unveiled today, research compiled by the Gold Industry Group in association with Deloitte Access Economics reveals that:

 • Australian mines produced more than 280 tonnes of gold, about 9% of global production, in 2016.

 • The gold mining sector currently provides full time employment for more than 26,000 people.

 •  About 50% of investment in mineral exploration goes to the gold sector – worth AUD 617.6 million in 2016.

 • Australia now has 66 operating gold mines, and 14 of the world’s largest.

 • The direct contribution of the mining of gold ore is estimated to be AUD 5.9 billion.

Which all helps to explain why Australia continues to be ranked second on the Reuters/GFMS league table of most prolific gold producing nations.



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Perth Mint CEO to headline precious metals investment symposium

Topics [ gold market gold investment ]

The Perth Mint’s Chief Executive Officer, Richard Hayes, a precious metals industry expert, will headline a key group of speakers at the 7th Annual Precious Metals Investment Symposium, being held in Sydney in October.

A thought leader on the global precious metals market, Mr Hayes will share his knowledge and unique insights into the industry at the two-day event. He will also discuss the ‘case for gold’ and investing long-term in precious metals to build wealth and reduce risk.


Perth Mint Chief Executive Officer, Richard Hayes.

Symposium conference organiser, Kerry Stevenson, said, “As the leader of one of the world’s most prestigious precious metals businesses, we are delighted that Mr Hayes will kick off the Symposium.”

“Richard has a vast knowledge of the precious metals industry and I have no doubt delegates will be left both impressed and delighted,” she said.

Since taking the reins at The Perth Mint in July 2015, Mr Hayes and a new executive team have devised a business strategy to position the organisation as a global leader in the precious metals industry.

Mr Hayes is bullish about precious metals. “There is much to learn from the fortunes and misfortunes of others when it comes to investing in an asset of true value – gold,” said Mr Hayes.

Mr Hayes is currently the Chairman of the Gold Industry Group. With a finance and economics background, he has 30 years’ experience in the investment and precious metals sector. He joined Gold Corporation (trading as The Perth Mint) in 2003 as Chief Financial Officer and Deputy CEO, and previously held senior positions with AGR Matthey and Golden West Refining Corporation Ltd. 

With a theme of Investing for Real Wealth in a Volatile Global Market, this year’s forum will provide an opportunity for Australia’s business leaders and investors to come together to engage and network in one of Australia’s most important sectors.

The Precious Metals Investment Symposium will be held at  Four Points by Sheraton, Sydney Darling Harbour on Monday 10 and Tuesday 11 October 2016.

Mr Hayes will deliver his keynote address at 9am on Monday 10 October 2016.

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World Gold Council: Investor demand for gold soars in Q2 2016

Topics [ gold market gold investment ]

Some key findings of the latest WGC Gold Demand Trends report:

 • Q2 2016 continued in the same vein as Q1 with overall gold demand growing to 1,050 tonnes, up 15% from the Q2 2015.

 • Q2 investment demand was 448 tonnes, up 141% from 186 tonnes in the same period last year.

 • Investment has now been the largest component of global gold demand for two consecutive quarters – the first time this has ever happened.

 • H1 demand for coins, bars and especially exchange-traded funds reached 1,064 tonnes, up 16% from the previous first-half year record in 2009.

 • Western investors generated the bulk of this demand, with smaller-scale investors very much in evidence in the U.S. and Europe.

 • The jewellery sector was depressed, with high and volatile prices creating unfavourable conditions for consumers in most markets.

 • Q2 global jewellery demand fell 14% to 444 tonnes versus 514 tonnes in the same period last year.

 • At 77 tonnes, central bank demand decreased 40% in Q2 2016, compared to 127 tonnes in the same period last year.

 • Nevertheless, overall gold demand for Q2 2016 increased by 15% to 1,050 tonnes, up from 910 tonnes in Q2 2015

Download Gold Demand Trends Q2 2016



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