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25 January 2018
Gold prices have continued their march higher overnight, currently trading near USD $1355oz. Silver has also rallied, continuing the impressive run in precious metal prices which dates back to mid December, with gold and silver up 9% and 12% respectively in this current rally.
Australian dollar returns continue to be impacted by the strength in local currency, which continues to hold above USD $0.80, with gold and silver in AUD pushing up toward (but not yet reaching) $1700oz and $22oz respectively.
The charts for gold show the bulls with the firm upper hand, though after a move of this magnitude, some kind of consolidation would not be unexpected. Most importantly, as you can see on a longer term chart, what appears to be a very clear reverse head and shoulders pattern has developed over the past few years.
Source: Stockcharts
The movement in prices over the last few weeks, and the constructive long term chart outlook suggests that we are well and truly back in bull market mode, even if its one that is being ignored by most market participants.
This week, the World Gold Council (WGC), released a fantastic report titled “The relevance of Gold as a Strategic Asset”.
As the report highlights, physical gold bullion plays four key roles in a portfolio, as it can be utilised as an investment that offers:
The middle bars show the correlation of gold and commodities and the S&P500 during all market environments, whilst the top and bottom bars show correlations in periods of more ‘extreme’ market performance, when the S&P500 is up or down by more than 2 standard deviations.
As you can see, when stocks are flying, gold is more highly correlated to stocks than commodities are (which is a good thing). When stocks are falling hard though, gold becomes negatively correlated to stocks, helping to protect capital, whilst commodities tend to fall in value alongside the stock market.
Broadening this insight out beyond looking at gold versus commodities in period of equity market weakness, it’s also important to note that the worse stocks tend to fall, the better gold tends to do, making it an even better portfolio protector than cash and bonds, which do well on a relative basis in periods of equity market weakness, but not as well as gold does.
With close to USD $3 Trillion of physical gold held by investors and central banks the world over, and with over USD $150bn in daily trading volume, gold is one of the most liquid markets in the world, as you can see from the chart below.
This serves as a useful reminder to investors that precious metals are an easy asset class to add to their portfolio, and that they’ll be able to both buy and sell the metal with minimal friction.
Gold is also highly sought after in Asia, India, Europe and North America, highlighting its truly global appeal whether it is being bought as a pure investment asset (in bar, coin or ETF form) or as an ostentatious display of wealth in jewellery form.
Chart 11 shows just how significant the increase in demand out of China and India has been, comfortably doubling over the last 20 years, and now accounting for the better part of 40% of annual gold demand.
Charts 12 and 13 speak to Western investor demand, which at a bar and coin level (chart 13) has exploded in both the US and especially Europe since the onset of the GFC.
Just as importantly, the creation of the gold ETF industry has revolutionised gold demand, allowing investors to buy gold in exactly the same way they buy shares. The strong growth in total tonnes of gold held in these ETFs speaks to how helpful these vehicles have been in terms of facilitating further precious metal investment, especially for investors forced to save via regulated vehicles (i.e. Australian Superannuation funds) that do not typically facilitate the buying of physical bars and coins directly.
Finally, Chart 14 highlights the complete about face we’ve seen from central banks when it comes to gold, which again coincided with the onset of the GFC. Prior to that, central banks had been net sellers of gold from the mid 1980s, much of which is seen in the chart. Since the GFC hit though – they’ve turned net buyers, with the majority of the purchasing taking place in emerging market and BRIC nations, who are understandably keen to diversify the composition of their FX reserves.
Add all this together, and the outlook for physical gold demand looks very promising in the years ahead.
There are a handful of other great insights, and facts and figures contained within the WGC report. For those of you who would like to read the report in full, you can find it here.
Until next time,
Jordan Eliseo
Chief Economist
ABC Bullion
Disclaimer
This publication is for educational purposes only and should not be considered either general or personal advice. It does not consider any particular person’s investment objectives, financial situation or needs. Accordingly, no recommendation (expressed or implied) or other information contained in this report should be acted upon without the appropriateness of that information having regard to those factors. You should assess whether or not the information contained herein is appropriate to your individual financial circumstances and goals before making an investment decision, or seek the help the of a licensed financial adviser. Performance is historical, performance may vary, and past performance is not necessarily indicative of future performance. Any prices, quotes, or statistics included have been obtained from sources deemed to be reliable, but we do not guarantee their accuracy or completeness.
Australian dollar returns continue to be impacted by the strength in local currency, which continues to hold above USD $0.80, with gold and silver in AUD pushing up toward (but not yet reaching) $1700oz and $22oz respectively.
The charts for gold show the bulls with the firm upper hand, though after a move of this magnitude, some kind of consolidation would not be unexpected. Most importantly, as you can see on a longer term chart, what appears to be a very clear reverse head and shoulders pattern has developed over the past few years.
Source: Stockcharts
The movement in prices over the last few weeks, and the constructive long term chart outlook suggests that we are well and truly back in bull market mode, even if its one that is being ignored by most market participants.
World Gold Council Report
This week, the World Gold Council (WGC), released a fantastic report titled “The relevance of Gold as a Strategic Asset”.As the report highlights, physical gold bullion plays four key roles in a portfolio, as it can be utilised as an investment that offers:
- A source of long-term returns
- A diversifier that can mitigate losses in times of market stress
- A liquid asset with no credit risk that has outperformed fiat currencies
- A means to enhance overall portfolio performance.
Strong Long Term Returns
As per the chart below, gold has delivered exceptional returns to investors since 1971, nearly matching the return of risk assets, and substantially outperforming defensive assets. For longer-term investors, on an after tax basis the outperformance would likely be even greater, given all of the gains in gold can be attributed to capital, rather than income, which would be taxed each and every year along the way.
Not Just Any Commodity
The following chart helps explain why its wrong to think of gold as part of the broader commodity complex. The chart shows the correlation of gold to the S&P500 and commodities to the S&P500 in three market environments.The middle bars show the correlation of gold and commodities and the S&P500 during all market environments, whilst the top and bottom bars show correlations in periods of more ‘extreme’ market performance, when the S&P500 is up or down by more than 2 standard deviations.
As you can see, when stocks are flying, gold is more highly correlated to stocks than commodities are (which is a good thing). When stocks are falling hard though, gold becomes negatively correlated to stocks, helping to protect capital, whilst commodities tend to fall in value alongside the stock market.
Broadening this insight out beyond looking at gold versus commodities in period of equity market weakness, it’s also important to note that the worse stocks tend to fall, the better gold tends to do, making it an even better portfolio protector than cash and bonds, which do well on a relative basis in periods of equity market weakness, but not as well as gold does.
Liquidity
Plenty of Bitcoin and cryptocurrency investors are who are looking to liquidate some of their holdings after the recent sell off are finding out the true value of liquidity, and how important it is when it comes to your investment portfolio.With close to USD $3 Trillion of physical gold held by investors and central banks the world over, and with over USD $150bn in daily trading volume, gold is one of the most liquid markets in the world, as you can see from the chart below.
This serves as a useful reminder to investors that precious metals are an easy asset class to add to their portfolio, and that they’ll be able to both buy and sell the metal with minimal friction.
Production and Demand – a Truly Global Phenomenon
The following chart breaks down both gold demand, and gold mine supply by region over the last 10 years. As you can see, gold is produced all around the world, including in Australia, where we produce circa 300 tonnes per annum.Gold is also highly sought after in Asia, India, Europe and North America, highlighting its truly global appeal whether it is being bought as a pure investment asset (in bar, coin or ETF form) or as an ostentatious display of wealth in jewellery form.
Evolving Nature of Gold Demand
The following charts highlight both the extraordinary growth in Chinese and Indian gold demand over the past 20 odd years, as well as trends in Western investment, and central bank demand.Chart 11 shows just how significant the increase in demand out of China and India has been, comfortably doubling over the last 20 years, and now accounting for the better part of 40% of annual gold demand.
Charts 12 and 13 speak to Western investor demand, which at a bar and coin level (chart 13) has exploded in both the US and especially Europe since the onset of the GFC.
Just as importantly, the creation of the gold ETF industry has revolutionised gold demand, allowing investors to buy gold in exactly the same way they buy shares. The strong growth in total tonnes of gold held in these ETFs speaks to how helpful these vehicles have been in terms of facilitating further precious metal investment, especially for investors forced to save via regulated vehicles (i.e. Australian Superannuation funds) that do not typically facilitate the buying of physical bars and coins directly.
Finally, Chart 14 highlights the complete about face we’ve seen from central banks when it comes to gold, which again coincided with the onset of the GFC. Prior to that, central banks had been net sellers of gold from the mid 1980s, much of which is seen in the chart. Since the GFC hit though – they’ve turned net buyers, with the majority of the purchasing taking place in emerging market and BRIC nations, who are understandably keen to diversify the composition of their FX reserves.
Add all this together, and the outlook for physical gold demand looks very promising in the years ahead.
There are a handful of other great insights, and facts and figures contained within the WGC report. For those of you who would like to read the report in full, you can find it here.
Until next time,
Jordan Eliseo
Chief Economist
ABC Bullion
Disclaimer
This publication is for educational purposes only and should not be considered either general or personal advice. It does not consider any particular person’s investment objectives, financial situation or needs. Accordingly, no recommendation (expressed or implied) or other information contained in this report should be acted upon without the appropriateness of that information having regard to those factors. You should assess whether or not the information contained herein is appropriate to your individual financial circumstances and goals before making an investment decision, or seek the help the of a licensed financial adviser. Performance is historical, performance may vary, and past performance is not necessarily indicative of future performance. Any prices, quotes, or statistics included have been obtained from sources deemed to be reliable, but we do not guarantee their accuracy or completeness.
