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This blog discusses The Perth Mint's bullion coins and bars, providing information about our latest designs, mintages, sales volumes and sell outs. On a broader front, we share relevant research and opinions for anyone interested in gold and silver bullion investing.

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Why you should carefully watch this one ratio as market volatility escalates

The S&P 500 to Gold ratio measures how many troy ounces of gold you could purchase with one 'share' of the S&P 500. If gold was trading at USD 1,000 per troy ounce, and the S&P 500 price index was at 1,000 points, then the ratio would be 1. 

The reason this ratio is popular and worth monitoring is because it can easily gauge the ‘mood’ of the investment community. A low ratio indicates investors are feeling pessimistic about the outlook for the economy and financial markets, whilst a high ratio suggests investors are optimistic. Many believe a low ratio indicates that gold is expensive relative to equities, whilst a high ratio indicates that equities are expensive relative to gold. 

The chart below plots the movements in the S&P 500 to Gold ratio from the beginning of the 1970s through to the end of last month, with the ratio sitting at 1.86 at the end of February 2020. 

Source: The Perth Mint, Reuters

The chart highlights that there have been four distinct multi-year trends in the Gold to S&P 500 ratio over the last 50 years.

• A decline in the ratio throughout the 1970s, as stagflation saw equity markets disappoint and gold prices soar. The ratio fell from over 2.25 to below 0.2 between 1971 and February 1980.

• An increase in the ratio throughout the 1980s and 1990s, as equities embarked on one of their greatest ever bull-market runs and gold prices languished in a two-decade bear market. As the chart highlights, the ratio peaked at almost 5.5 in August of 2000. 

• A decrease in the ratio from August 2000 through to August 2011, driven by a multi-year bull market in gold which saw the price rise from below USD 300 to above USD 1,800 an ounce. Equities were battered by the NASDAQ crash, the September 11, 2001 terrorist attacks and the Global Financial Crisis, which contributed to the ratio dropping from 5.47 to just 0.67 during this period.

• An increase in the ratio from 0.67 in late 2011 to 2.45 by September 2018. This was driven by a rally in the S&P 500 where it rose from 1,219 to 2,913 points and gold prices (in US dollars) fell by 35% over this time period. 

The table below plots the price of gold, the price level of the S&P 500, and the S&P 500 to Gold ratio at each of the inflection points mentioned above. It also details the reading as at the end of Friday 13 March 2020, when data for this article was collated.

Source: The Perth Mint, Reuters

The ratio has begun to turn down again

The table above highlights the fact that the S&P 500 to Gold ratio has begun to move lower over the past 18 months, falling from 2.45 at the end of September 18 to 1.77 on Friday 13 March 2020. 

This highlights the fact that gold has outperformed the S&P 500 recently, with the USD price of gold up by 28.31%, whilst the S&P 500 has declined by 6.97% over this time period.

This is important as a declining ratio will likely encourage further investment into gold going forward, particularly when the fall in the ratio is being driven by  heightened volatility in equity markets. 

In periods where gold and equities rise together (like they did for most of 2019), there is minimal to no opportunity cost if a portfolio manager or personal investor doesn’t own gold, as their stock portfolio is growing. 

Gold going up alongside the equity market is a curiosity to many investors. Gold going up whilst equities are tanking and fear abounds is an entirely different phenomenon. One that typically leads to an increase in all types of investors wanting to own the precious metal. 

What happens next?

From 1971 through to the end of February 2020, the S&P 500 to Gold ratio has averaged 1.54, roughly 13% below the 13 March 2020 reading of 1.77. By this metric, gold is somewhat cheap relative to equities, though nowhere near as cheap as it was on a relative basis back in August 2000, when the ratio was above 5. Gold is also not as expensive as it was on a relative basis in February 1980, when the ratio bottomed out at 0.18.

Whilst no one can state definitively which way this ratio will move going forward, there is a good chance it will continue to decline, with gold continuing its recent outperformance relative to equity markets.

Even if the impact of Coronavirus is less severe than currently anticipated it remains a fact by many metrics, including price to sales and cyclically adjusted price earnings ratios, that equity markets even after their recent correction are still expensive by historical standards.

To that end, whilst the recent pain we have seen in equity markets has been swift, it has not yet been brutal, at least not relative to prior periods where equities were trading at such lofty multiples, with historical drawdowns of over 50% not uncommon. 

The policy response that we have seen from central banks since late February, coupled with already low to negative real interest rates and government bond yields, will of course provide some support for equity markets going forward, but history would suggest it will also benefit gold. 

Indeed research from The Perth Mint looking at investment returns from 1971 to 2019 found that gold delivered average annual increases of just over 20% in years where real interest rates were 2% or less, like they are today. 

Given all of these factors, the strategic case for including gold in an investment portfolio today remains compelling.

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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SIMPLE GUIDE Gold as a hedge against financial calamity

Topics [ gold investing simple guide ]

Investopedia says a hedge is “an investment to reduce the risk of adverse price movements in an asset”.

In other words, a hedge is an investment that is more likely to move up in value when other assets in a portfolio decline in price.

It has often been observed that gold has an inverse relationship with the stock market. When equities are high, gold can be relatively cheap.

When equities take a marked nosedive, often as not, demand for gold as a safe haven skyrockets.

In this sense, gold can be regarded as ‘insurance’ against financial calamity. In theory, at least, it may help to maintain overall portfolio value.

Our Senior Investment Manager, Jordan Eliseo, turned to recent history to test the validity of the idea.

His chart plots the returns for gold and for equities in the worst five calendar years for Australian equity markets between 1971 and 2019.

“With the exception of 1990, when it was basically flat, gold delivered exceptionally strong gains in the years when equity markets suffered their largest falls,” Jordan reported.

The figures equate to an average increase of almost 40% for gold, whilst the share market saw average falls of almost 25%, he observed.

Jordan’s investigation also revealed that in these years of extreme volatility, gold outperformed bonds and cash as well.

While the data for 2020 is yet to be crunched, it looks almost certain that this year will deliver an even stronger message about the reasons to hedge your portfolio with an allocation to gold.




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1oz gold, silver and platinum coins from Australian Lunar III sell out at The Perth Mint

Topics [ platinum bullion coin silver bullion coins gold bullion coins ]

The Australian Lunar Bullion Coin Series III has been enthusiastically received by investors with news that all 30,000 1oz gold coins, 300,000 1oz silver coins and 5,000 1oz platinum coins marking the 2020 Year of the Mouse have sold out.

These popular Australian Lunar releases lay claim to be part of the first major coin program in the world to celebrate the ancient Chinese lunar calendar. Introduced in 1996, they’ve been mimicked many times, but retain their reputation as the highest quality Lunar coins in the world.

“Sales of Series III coins celebrating the Year of Mouse are very encouraging to date,” Group Manager – Minted Products Neil Vance said. “The popular 1oz gold and silver denominations have now sold out for 13 consecutive years, and we’re also delighted by the reaction to our first ever platinum Lunar bullion coin.”

He added: “We’re already looking forward to offering our clients 11 more fresh animal designs from Series III to continue the Australian Lunar’s huge international success.”

Buyers keen to add Lunar Mouse coins made from 99.99% pure gold and 99.99% pure silver to their bullion stacks can still invest in variety of other denominations.

A choice of 1/20oz, 1/10oz, 1/4oz, 1/2oz, 2oz and 10oz gold coins and 1/2oz, 2oz, 5oz and 1 kilo silver coins will remain available until the launch of 2021 Year of the Ox releases next September.

Registered clients may order online at perthmintbullion.com. All buyers are welcome to visit our Bullion Trading Desk at 310 Hay Street in East Perth (open 7 days), or call the BullionLine on 1300 201 112 (Australia) / +61 8 9421 7218 (International).

Alternatively, please contact one of our authorised distributors.



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Will silver deliver strong gains for investors in 2020?

Topics [ silver investing ]

Precious metals are back on the investment radar in 2020, with the price of gold rising by over 12% in AUD terms and 4.5% in USD terms in the first two months of the year.

The strong performance continues a period of substantial price growth that dates back to Q4 2018, when a sharp decline in equity markets helped kickstart the rally in gold. Since then, the price of gold has increased by 48% in AUD terms and 33% in USD terms, with investment demand soaring.

Evidence of this can be seen in a Bloomberg news story from 26 February 2020, titled “Gold -Backed ETFs have never seen a run of inflows like this”, that highlights the fact that gold ETFs had seen net inflows for 25 days in a row, with total holdings at all-time highs.

Whilst it is true that gold has been a stellar performer of late, it is not the only precious metal achieving solid results. Silver has also delivered strong gains for investors, with the price rising by 29% in AUD terms and 16% in USD terms between Q4 2018 and the end of February 2020.

Crucially, just like gold, silver has substantially outperformed the broader commodities market over this time period. This is evidenced in the chart below, which plots the returns of gold, silver, oil and copper, as well as the ASX 200 from end September 2018 through to end February 2020.

Source: The Perth Mint, Market Index, London Metals Exchange, oilprice.com

The chart highlights the strong outperformance of gold and silver, with both rallying in Q4 2018, a period in which the ASX 200 and other commodities sold off.  This demonstrates that both gold and silver have monetary safe haven qualities, unlike most commodities, which historically sell off during periods of equity market weakness and/or heightened concerns regarding the health of the global economy.

Strong demand for Perth Mint silver

The increase in the silver price has helped drive a notable increase in investment demand for Perth Mint products.

Since September 2018, sales of silver minted products have averaged almost 1 million ounces per month, which is a 28% increase relative to the average demand seen in the prior six years.

Demand for silver expected to rise

According to The Silver Institute update in early February 2020, “macroeconomic and geopolitical conditions will remain broadly supportive for precious metals, encouraging investors to stay net buyers of silver overall.”

Drilling down into certain sectors of the market, The Silver Institute expects:

 • Holdings in silver exchange-traded products (ETPs) to remain elevated in 2020. Profit-taking in ETPs is likely to be limited, even with a price rally.

 • Silver physical investment, which consists of purchases of silver bullion coins and bars, is forecast to increase for the third year in a row, up by around 7 percent in 2020.

Price wise, The Silver Institute is bullish with their forecast suggesting the USD silver price would average USD 18.40 this year, an increase of over 13% relative to last year. The expected price rise (much of which we’ve already seen in January and February) “is premised mainly on a positive spill-over from gains in gold, as the yellow metal will continue to benefit from macroeconomic and geopolitical uncertainties across critical economies. Concerns about the state of the global economy will have possible negative consequences for the industrial metals, and by extension, silver. However, the weight of institutional money flowing into a relatively small market should prove sufficient for silver to outperform gold.”[1]

Is silver set to outperform?

Whilst there are no guarantees that silver will outperform gold in 2020 and beyond, it is not uncommon for this to happen, especially in strong precious metal bull markets where the prices of both gold and silver rise.

As an example, between October 2008 and August 2011, the price of gold rose from USD 723 to USD 1823 per troy ounce, an increase of just over 150%. In that same time period, the price of silver rose from USD 9.81 to USD 41.47 per troy ounce, an increase of over 320%.

The gold to silver (GSR) ratio, which measures how many troy ounces of silver you need to buy for one troy ounce of gold, fell from 74 to 44 between October 2008 and August 2011, highlighting silver’s outperformance.

As at the end of February 2020, the GSR is sitting just above 95, with movements in this ratio from the end of 1999 through to today seen in the gold line on the chart below. The grey line represents the average GSR over time.

Source: The Perth Mint, Reuters

The chart makes it clear that the current GSR is the highest it has been in the past twenty years, indicating that over this time period, silver has never been this cheap relative to gold.

Assuming the gold price continued to trade at USD 1,600 per troy ounce (where it is at the time of writing), silver would need to rise to just under USD 25 per troy ounce for the GSR to revert to its average of the last 20 years, which is 65. That would be an almost 50% rally in the silver price, relative to where it is trading today.

For longer-term investors who can live with the greater price volatility that silver displays, the near all-time highs in the GSR are a notable development, highlighting the return potential that silver may offer in the years ahead.

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.

[1] Global Silver Market Forecast To Shine in 2020, The Silver Institute, 02.12.2020



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Perth Mint Gold: Monthly holdings report – February 2020

Topics [ Perth Mint Gold ]

Perth Mint Gold (ASX: PMGOLD) holdings hit a new all-time high of 150,480 ounces (4.68 tonnes) in February 2020, with inflows of over 12,700 ounces for the month.

Monthly flows into PMGOLD can be seen in the chart below, with last month setting a new record for inflows, marginally exceeding the prior record which was set back in August 2019.

Source: The Perth Mint, ASX, Reuters

Inflows in February continue a strong run for PMGOLD that dates back to September 2018, with total fund holdings rising by more than 78% during this time period.

The value of PMGOLD holdings also topped AUD 350 million for the first time ever in February, driven by  the record inflows, as well as the 2.76% rise in the Australian dollar gold price, which ended the month at AUD 2,441 per troy ounce.

To learn more about investing in PMGOLD, simply download our PMGOLD Factsheet.




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Why is gold the best portfolio hedge when equities fall?

Topics [ gold analysis ]


It has been a strong start to 2020 for gold, with the yellow metal rising by 12.99% in AUD terms, and 4.54% in USD terms in the first two months of the year. The increase in the price has seen an uptick in investment demand, as well as a surge in enquiries across our entire business from potential investors looking to find out information about the gold market.

There has also been a surge in enquiries from potential investors, with many looking for information on how gold has typically performed during periods of equity market weakness.

With fears over Coronavirus and a deteriorating global economy continuing to build, there appears to be growing concern that the more than 10% fall on the ASX in late February may usher in a period of higher volatility, and lower returns for equity market investors.

If that were to happen, then history would suggest that gold is likely to perform well, as it has recently, with the yellow metal having an unmatched track record of strong performance whenever equities have fallen hardest.

This is best seen in the chart below, which plots the returns for gold and for equities in the worst five calendar years for Australian equity markets between 1971 and 2019.

Source: The Perth Mint

The chart above shows that with the exception of 1990, when it was basically flat, gold delivered exceptionally strong gains in the years when equity markets suffered their largest falls. The figures amount to a performance differential of almost 65%, with gold delivering an average increase of almost 40%, whilst the sharemarket saw average falls of almost 25%.

Not only did gold perform well in absolute terms in these environments, but in relative terms as well, with a study from The Perth Mint based on data from 1971 to the end of 2019 highlighting the fact that the yellow metal outperformed bonds and cash during periods of heightened equity market weakness.

Gold’s diversification qualities, and the way that it can help protect a portfolio during periods of equity market volatility are relevant at all times, but particularly today, given the ongoing risks in equity markets.

What are the risks?

The economic and geopolitical risk factors facing equity markets in 2020 and beyond are well established. Debt to GDP levels are higher than when the Global Financial Crisis (GFC) hit ten years ago, whilst interest rates are much lower, leaving less room for central banks to deploy conventional monetary policy tools to assist in the next downturn.

Beyond those factors are the warning signs in the equity market itself, including:

 • Markets are near all-time highs, having gone through one of the longest bull runs on record.

Despite the recent volatility, equity markets like the S&P 500 are trading near their all-time highs, with a decade long bull market that some analysts are claiming is the longest on record.

Locally, the ASX pushed through the 7,000-point barrier in January, whilst the accumulation index has increased by approximately 85% from its 2007 high, and 245% from its GFC low.

These are superb returns, but they belong to the past.

 • Price to earnings ratio near record highs

A second warning sign for equity markets can be seen when looking at the S&P 500 cyclically adjusted price to earnings ratio (CAPE), with investors currently paying just over 34 times earnings to be owners of stock. This is a substantial increase, as during the worst of the GFC, the CAPE ratio dropped to just 15.

This can be seen in the chart below, which plots the CAPE ratio from 1900 onward. As the chart makes clear, the current CAPE reading has only been exceeded twice in the last 120 years.

Source: The Perth Mint, Robert Shiller Online Data

The first of those was back in 1929 when CAPE hit 39, whilst in 1999 the ratio hit 48. Suffice to say that investors who bought into US equities at those levels were not well rewarded in the decade that followed. Will this time be different?

As a brief aside, whilst it might be accurate to say there is little consumer price inflation in the world today, the rise in CAPE (seen in the above chart) highlights substantial asset price inflation in the ‘post’ GFC environment. The price investors have to pay to be an owner of stock, as measured by CAPE, has increased by more than 11.5% per annum over the last 11 years.

 • Price to sales ratio at all-time highs

A further warning sign for equities is the price to sales ratio for the S&P 500, which is calculated by dividing the share price of a company (or the market as a whole) by the dollar value of the sales a company generates.

As an example, if a fast food company was trading at $100 per share, and they generated $100 of hamburger sales in a year, then the price to sales ratio would be 1:1.

The chart below plots the price to sales ratio for the S&P 500 as a whole, rather than an individual company, over the last twenty years, with this reading recently hitting an all-time high of 2.40. During the GFC, as the chart highlights, the ratio dropped to just 0.8.

Source: The Perth Mint, multpl.com

Using our fast food company analogy again, back in 2009 sharemarket investors needed to spend $80 to buy $100 worth of hamburger sales. Today those same $100 worth of hamburger sales cost investors $240.

That’s an inflation rate of approximately 18% per annum over the last 11 years.

 • The rise of zombie companies

In 2018, the Bank for International Settlements (BIS) released a report looking at the rise of ‘zombie’ companies that are listed on global equity markets.  Zombie companies are in effect organisations whose profits can’t meet their current debt servicing costs.

Logic would suggest that in the ultra-low interest rate environment we have been in over the last decade, there would be very few companies in this predicament. In reality, the opposite is true, with the BIS paper (which looked at 14 advanced economies) suggesting 14% of firms were zombies by the end of 2016, up from just 2% in the late 1980s.

This is not just a northern hemisphere phenomenon, with research from Coolabah Capital looking at the Australian market finding that up to 17% of companies listed on the ASX were zombies by the end of 2018, up from just 10.8% in 2010.

Whilst low rates will continue to help keep these companies afloat, one struggles to see how they can meaningfully lift investment given the apparent fragility in their financial circumstances.

Over the long-run one can expect this to depress economic growth rates, with the BIS themselves stating that; “Zombie firms are less productive and crowd out investment in and employment at more productive firms.”

Summary

Whilst none of the above factors guarantee that a stock-market crash is imminent, or even that equity markets will perform poorly in years to come, they do suggest caution is warranted, especially given the ongoing economic risks and geopolitical tensions.

Astute investors pay attention to the warning signs financial markets give off, and right now those warning signs are significant.

Combine these risks with the low to negative real yields available in traditional defensive assets like cash and bonds, and the strategic case for including gold in an investment portfolio today remains compelling.

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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