Written by Jordan Eliseo, Senior Investment Manager, The Perth Mint
The rise in the gold price beyond AUD 2,000 per troy ounce and multiple interest rate cuts by the Reserve Bank of Australia (RBA) helped drive a surge in demand from Australian investors throughout 2019.
The rise in demand includes increased buying from self-managed super fund (SMSF) trustees. Flows into gold continued to increase in the first two weeks of 2020 as rising tensions between the United States and Iran temporarily propelled the gold price to a year’s high of AUD 2,350 per troy ounce.
Over the past 15 months gold has strongly outperformed the local equity market, climbing more than 31% in Australian dollar terms since the end of September 2018. The outperformance of gold across this time period can be attributed to a range of factors including:
- A return to monetary easing by the US Federal Reserve, with multiple interest rate cuts throughout 2019.
- The significant decline in bond yields globally, with US and Australian 10-year government bond yields dropping by 29% and 41% respectively in 2019.
- The increase in the value of negative yielding debt, which at one point last year topped USD 17 trillion.
- The US yield curve inverting in 2019 amid growing recession fears and continued concerns regarding Brexit and uncertainty over a US-China trade deal.
These factors have steered investors toward safe-haven assets like gold, with demand rising for the precious metal across the globe. This has been evident through:
- Global gold ETF holdings, which hit an all-time high in 2019. The Perth Mint has seen this increase in demand firsthand, with holdings in its ASX-listed product Perth Mint Gold (ticker PMGOLD), widely used by SMSF trustees, growing by more than 45% for the year.
- A surge in gold demand by high net worth investors. A late 2019 report by Goldman Sachs stated that volumes of gold custodied in countries like Switzerland and the UK had grown by more than 1,200 tonnes across the past three years.
- Unprecedented levels of central bank gold buying, with estimates predicting upwards of 660 tonnes were purchased by these institutions in 2019, the highest annual figure recorded in 50 years.
Going forward, we expect that demand for gold will be supported by many factors including continued central bank buying and the desire of investors to seek out protection against potential equity market volatility.
Gold’s ability to protect against falling equity markets is explored in an SMSF investment whitepaper published by The Perth Mint in 2019 which highlights the fact that gold has been the highest performing asset when equity markets sell off.
Another key influence on gold demand, and therefore the gold price in years to come, is the low-to-negative real yields investors are earning on traditional defensive assets all around the world.
This will be particularly relevant for Australian investors including SMSF trustees in the decade ahead. The chart below shows that traditional cash investments and the vast majority of fixed income investments are now losing value in real terms.
Cash and several other fixed income investments, which currently offer nominal yields ranging from 0.65% to 2.26%, are no match for inflation, especially for some of the ‘need to have’ items in life such as health care and utilities. Over the past 10 years the increase in the cost of those utilities has averaged between 4.4% and 5.4% per annum. This has dwarfed the returns on ‘low risk’ investments like cash, which at present looks like it will lose value in real terms for the entirety of the next decade.
Given this environment, we expect to see gold demand from SMSF trustees continue to rise in the years to come as more Australians – like retired lawyer Ollie Price who, according to an ABC article, recently decided to move 20% of his portfolio into gold – gain exposure to the precious metal.