Despite its recent pullback, gold is well and truly back on the investment radar with the price rising above AUD 2,200 per troy ounce for the first time ever in 2019. To the year end in October, the price of gold rose in excess of 25% in Australian dollar terms, more than doubling the return of the local sharemarket.
The rally sparked a surge in demand for gold, including in Australia, where The Perth Mint has experienced a substantial increase in the number of people investing in the precious metal through its multitude of investment solutions.
Most notable has been the growth in its ASX listed gold product (ticker PMGOLD), which grew by almost 45% in the twelve months to end October, with much of this demand driven by SMSF trustees diversifying their portfolio with an allocation to gold.
Why has gold rallied this year?
The rally in gold over the past twelve months began with the rise in equity market volatility during the last quarter of 2018, with the ASX losing nearly 15% of its value in that three month period.
That decline helped to drive demand for gold, an asset which has traditionally held or increased in value during volatile times and is universally accepted as a safe haven investment.
In 2019, gold prices have continued to trend higher despite the recovery in equity markets due to several factors including;
- A plunge in global bond yields, with the market value of debt trading with a negative yield hitting USD 16 trillion in August 2019. This has favourably impacted gold as lower government bond yields generally motivate investors into seeking alternative safe haven assets, including gold.
- Continued concerns about the US-China trade war.
- Escalating geo-political tensions in the Middle East.
The importance of interest rates
Lower interest rates have also been a key driver for gold this year, with the majority of central banks in developed markets easing monetary policy in 2019. This includes the Reserve Bank of Australia, which this year made three cuts to the local cash rate, which now sits at an all-time low of just 0.75%.
Reductions in the cash rate have driven both demand for gold and the rises in price, as investors seek alternative investment solutions given the real return on cash once inflation is factored in, is negative.
Gold’s strong return over the last twelve months aligns with its historically strong performance during low real rate environments, with it delivering annual average nominal gains of just over 20% in Australian dollar terms in years when real interest rates were low.
This can be seen in the chart 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%
1971 to 2018 inclusive
As the chart makes clear, historically gold has tended to outperform other asset classes in the kind of the monetary environment investors face today.
The role of gold in your portfolio
In addition to its strong performance in years where real interest rates are low, gold offers a number of benefits to investors. These include:
- Strong long-term returns: The price of gold in Australian dollars has risen by approximately 9% per annum since the start of the 1970s, outperforming many other asset classes.
- Hedge against equity market risk: Gold has historically been the highest performing single asset class in years where the equity market falls, as investors turn to gold as a way of protecting and growing wealth in such environments.
- Currency diversification: Gold provides currency diversification for Australian investors, who will benefit from any fall in the value of the Australian dollar.
- Low cost: Gold is a very low-cost investment to incorporate into a portfolio. As an example, Perth Mint Gold (ticker PMGOLD), which trades on the ASX like a regular share, has a management fee of just 0.15%.
- Liquidity: Gold is highly liquid, with a turnover of more than AUD 150 billion per day, making it easy to buy and sell.
Australian investors face a unique challenge as they attempt to protect and build wealth in the next decade.
Sharemarkets are exposed to risk, with a number of economic indicators highlighting the fact that the global economy is weakening and recession risks are unlikely to disappear anytime soon. Furthermore, central banks are back in easing mode, meaning traditionally low risk assets such as cash and bonds are likely to deliver low to negative returns throughout the coming decade.
In such an economic environment, gold should continue to find favour.
Written by: Jordan Eliseo, Senior Investment Manager, The Perth Mint