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What is a Self-Managed Super Fund (SMSF)?

16 December 2020

Managing your own super can be daunting to many, but it does allow you greater financial freedom. With an SMSF you can determine exactly where your money is invested. Similar, to Industry Super your employer pays into your SMSF except you manage it personally.
This is different to an Industry Superfund; where you are limited to where you can invest your money.

Why You Should Manage Your Own Super

A new level of flexibility comes with managing your own super. If you wish to invest in precious metals using your super, with a standard industry super account your options are very limited. Whereas taking management into your own hands allows you to buy physical metal.

Why Should I Invest With My SMSF?

  1. Gold has Delivered Strong Long-Term Returns
    Anyone who has held a core position in physical gold or silver bullion for the last few decades has done well, seeing a substantial appreciation in the value of their investment. This is captured in the chart below, which highlights the increase in the Australian gold and silver price from January 1976 (when it became legal for Australians to own gold) through to January 2020.



    Just how strong the return for gold has been over the past fifteen years, in both a relative and absolute basis is captured in the following table. It highlights both the short, medium and longer-term returns for gold, as well as a variety of other asset classes, including shares, cash and property where SMSF trustees tend to concentrate a large portion of their investment portfolio.



    Gold did not only perform well in 2019, returning 19.1% for the year, but also outperformed other major asset classes over the longer term, in some cases by a considerable margin. Over the 44 years from 1976, when it became legal for Australians to own gold, to 2019 the price of gold has increased by 7.0% per annum compounded. Whilst more traditional assets like shares have rallied after the significant correction they experienced during the global financial crisis, gold has clearly been an asset that has benefited the portfolio of any trustees who have held a core position in the metal for many years. Anyone devising an investment strategy for their SMSF should consider incorporating a physical gold allocation into their portfolio, given its medium to long term returns.
     
  2. Gold has a Better Track Record Than Cash
    Gold has long been recognised as a monetary savings asset. Most people are aware of a time when the world operated under the ‘gold standard’, a period where money itself and physical gold were essentially interchangeable at a fixed price.
    Whilst the economy doesn’t operate based on a ‘gold standard’ anymore, gold is still used as a money equivalent in many parts of the world, and indeed central banks continue to hold and buy vast quantities of the precious metal (see point 8). Gold is also recognisable and tradable internationally, making it a de-facto foreign currency and monetary savings asset for investors the world over.
    Over the medium to long term, those who have chosen to keep a portion of their savings in precious metals rather than keeping it all in a bank account have been rewarded. This is because gold’s capital appreciation has matched the income one would have earned keeping money in the bank, as the following table illustrates.



    The gap between the return on cash and the return on gold has expanded significantly in the past few decades, owing to record low interest rates in Australia and around the world, and which look set to continue in the foreseeable future.
    Note that the returns assume reinvestment of interest but exclude tax. Considering the tax advantages of gold’s returns befitting from the capital gains tax discount versus paying income tax on interest earned annually, the long-term net return differential between gold and cash would be larger.
     
  3. Gold Returns Are Strongest When 'Real' Interest Rates Are Low
    Precious metal prices tend to do best in environments where ‘real’ interest rates (which are calculated by subtracting the inflation rate from the interest rate) are low, or even negative, like they are all around the world today.
    The higher the ‘real’ rate of return a bank will pay you for depositing money with them, the less attractive it is to own gold, which doesn’t pay any income. Therefore, when ‘real’ interest rates are high, there is a larger ‘opportunity cost’ of investing in gold, in terms of interest foregone.
    The opposite is also true. If, like today, the bank is effectively paying you less than the rate of inflation on money you have deposited with them, then there is minimal ‘opportunity cost’ in holding gold.
    Ultra-low ‘real’ interest rates encourage investors to place a portion of their money in gold instead, as it is an asset that has much better track record of protecting ‘real’ purchasing power over time, and as discussed above, it can outperform cash over the long run too.
    The chart below shows physical gold priced in Australian dollars compared to periods when the return on a 3-month term deposit after inflation was below 2 % per annum. Gold provided healthy returns during the high-inflation 1970s and post-2008 financial crisis when central banks artificially supressed interest rates.



    A low to negative ‘real’ interest rate environment is exactly where we find ourselves today, all over the world. And with economic growth still weak, global debt levels even higher than when the global financial crisis hit, and central banks still providing extraordinary stimulus to financial markets, it’s highly likely that we will be in a low to negative ‘real’ interest rate environment for many years to come.
    These interest rate settings will continue to encourage investors, such as SMSF trustees into the precious metal market and bodes well for higher gold prices over this period.
     
  4. Gold Acts as a Hedge Against a Falling Australian Dollar
    As gold is priced in US dollars, it acts as a natural currency hedge for an Australian investor, which is something many SMSF trustees are looking for in their portfolio today. As most Australians know, the mining boom saw the Australian dollar rise substantially, with the local currency at one-point trading well above parity with the US dollar back in 2011. This is captured in the chart below, which plots the value of the Australian dollar exchange rate against the US dollar since it was floated.



    While the AUD has fallen since its peak in 2011, further weakness is possible due with the RBA determined to maintain low interest rates and consider quantitative easing as they attempt to get the Australian economy and inflation back on target.
    The potential for gold prices to rise in US dollar terms combined with the likelihood of a lower AUD make physical gold a compelling investment for SMSF trustees. Not only do they stand to benefit from the possible underlying price appreciation of gold itself, but also from any further weakness in the local currency, which will magnify gains.
    Just as importantly, from a risk management perspective, by investing in gold SMSF trustees are gaining a natural foreign currency exposure in their portfolio, one that will arguably do a far better job balancing out their portfolio than international shares would. With overseas equity markets at all-time highs, and a high correlation to the local stock market, they may not provide the sort of diversification investors require.
    If you feel that the AUD is set to enter a period of decline, investing a portion of your investment portfolio in gold has the potential to generate good returns.
     
  5. Gold Is Highly Liquid and Easy to Trade
    When it comes to liquidity, SMSF trustees can be reassured that gold is one of the most liquid asset classes on the planet, with over US $110 billion worth trading each day – comparable to the entire US stock market, which trades $124 billion daily.
    With 43% of the Australasian gold and silver refining market, ABC Refinery receives significant quantities of gold and silver from some of Australia’s largest miners, which it processes and supplies to jewellery and bullion markets across the region. This constant flow of gold and silver gives SMSF trustees comfort regarding the liquidity of the metals they trade through ABC Bullion, knowing they can buy and sell easily.
    Trading can be done online 24 hours a day, over the phone, or in person at our showrooms in Sydney, Melbourne, Brisbane and Perth. Trustees also receive regular storage statements, showing both the quantity and the value of their metal holdings, and can request updates at any time. They can also track the value of their portfolio online, much like they can for their share portfolios.
    The simplicity, transparency and liquidity of the gold market, plus the fact that it can be stored so affordably, either with ABC Bullion or via our private vaulting partner Custodian Vaults, is an attractive quality encouraging precious metal investment by SMSF trustees.