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Special Report 2: Gold versus Platinum (no - not the metal)

13 August 2014

Just over a year on from the largest precious metal correction in decades, and in an environment where equity markets appear unstoppable, it might seem futile to explain the benefits of investing in bullion to new investors, including Australia’s ever growing army of SMSF Trustees.

Indeed, many investors who flocked to bullion only a few years ago are re-assessing their investment strategy and deciding whether or not it makes sense to divest their holdings and allocate their investment capital back into the stock market. This is a sentiment that is particularly acute amongst those who were ‘late to the party’ with gold, and who invested near the peak in 2011.

Those investors have seen a significant decrease in the value of their holding, with the gold price falling from circa US $1900oz in September of 2011 to below US $1200oz by June 2013.

Australian dollar gold investors, including the legion of SMSF clients that we already have at ABC Bullion have, have also seen their bullion values decrease, though they’ve been somewhat cushioned from the correction due to the fall in the AUD in the past 12 months.

Either way, despite climbing roughly $100oz in the past year, gold still has much catching up to do.

With that in mind, lets look to the future – how should investors position their portfolios?

According to the latest investment patterns survey from Multiport, a leading SMSF administration service, the breakdown of a typical self directed investor portfolio looks something like this.

SMSFALLOCATION

As you can see, they already have a healthy chunk of their portfolio in Australian shares, with a likely preference for high and regular dividend paying companies like our four big banks, which are some 30% higher than their pre-GFC highs, as well as some Telstra, Woolworths and Wesfarmers.

They also have decent exposure to property, which has had a great run of late, especially in NSW.

The big question many are grappling with is what to do with the roughly 20% that they have sitting in cash (note that statistics from the ATO suggest the cash holding from the average SMSF Trustee is closer to 30%).

This money is effectively going nowhere, if not backwards in real terms, what with the RBA cutting rates to all time lows, even if inflation isn’t YET a major threat to investor portfolios. One of the areas that many are looking at investing further in is international equities, with the argument being that investors can effectively diversify some of their equity exposure away from financials and resources (which dominate the ASX), whilst at the same time positioning their portfolio to benefit from a potential fall in the AUD.

This is understandable, and we certainly agree a case can be made to incorporate international equities into any portfolio, but trustees may also wish to look at incorporating an allocation to physical gold bullion in their portfolio too, especially if the last decade is anything to go by.

To help make the case, we’re going to compare the performance of gold to the performance of Platinum, not the other physical precious metal, but the powerhouse Australian funds management group, headed up by legendary billionaire Kerr Neilson, whose flagship Platinum international equities fund is a recognised market leader in this space.

Gold vs. Platinum – a look back in time.

The unhedged international equities fund that Platinum run was born on the 28th January 2005, just under 10 years ago.

Over that time, the performance of both the fund, as well as gold (in Australian dollars) has been remarkably similar, with the fund returning 11.20%, whilst gold has returned 10.30%. These returns have both been achieved with largely the same volatility as well.

The following tables break down some of the key performance statistics over that time.

Returns

Platinum unit prices and performance can be seen here

In an absolute sense, you would have made slightly more money investing in Platinum than in Gold over the past 9 and a bit years that the Platinum fund has been around.

To achieve that though, investors would of course had to put all their eggs in the international equities basket, and would also had to have known that Platinum was the fund to pick, as international equity indexes have not fared as well as this giant of the space.

Prudent investors would have in all likelihood been more than satisfied with an allocation to both gold and to Platinum, as a balanced approach would have achieved much the same result from a return perspective, with considerably less risk.

Indeed when we break down the performance on a yearly basis between the two investments, and look at the movements in both, as well as create a ‘hybrid portfolio’, with a 50% weighting to Gold, and a 50% weighting to Platinum, the statistics are compelling

As you can see from both the table below, as well as the time series graph that follows, a ‘diversified’ investor would have done well incorporating both bullion and the leading international equity fund manager into their portfolio.

YearbyYear

* Note this table is calculated using World Gold Council daily spots on or as close to the end of June for each calendar year, whilst for Platinum, its calculated based on the exit price and includes distributions paid in each year.

LineSeries

Moving forward, anyone keen to diversify, protect and grow their assets might want to follow a similar balanced approach, especially considering the still uncertain economic environment we face in the second half of 2014 and beyond. This uncertainty covers both the economic and geopolitical sphere, with sovereign debt accumulation still plaguing the developed world.

Against that backdrop, international equity markets that are back at or above all time highs should be approached with caution. This is especially so when one considers the skyrocketing margin debt levels that have accompanied the rally we’ve seen in equity markets the past couple of years, plus the fact that earnings growth that has been hugely influenced by debt funded stock buy-backs.

Finally, when we consider that cyclically adjusted price earnings ratios are approaching the kinds of levels from which 50% (or more) declines in stock markets are not uncommon, wise investors are thinking twice before moving heavily into international equity markets.

On the flipside, when we look at gold bullion, we can see that, despite the price correction in 2013, we observe the following

• Whilst the Fed will likely fully taper QE, they’re still going to be stuck with low interest rates for years to come

• In other developed nations, interest rates are also set to remain zero bound as far as the eye can see even long after quantitative easing in Japan, the UK and Europe ends

• Every major developed nation is still running government deficits, adding to their already record sovereign debt burdens

• After two decades as net sellers of gold, central banks have turned net buyers of gold, especially the central banks of emerging powers like China, Russia, India, Brazil and the oil exporting nations

• Citizens in China and India are also buying record quantities of gold, a trend that is likely to strengthen in the coming years due to their rising wealth and their historical attraction to precious metal ownership

With that in mind, there is a very good chance that the gold price correction of the last two years does not spell the end of the bull market, but rather represents a fairly typical mid-cycle correction, much like we saw in the middle of the 1970’s, which the chart below highlights.

70s

As such, precious metals today represent a fantastic buying opportunity, for in all likelihood, the secular bull market in precious metals is still alive and well, offering a great potential return in a world where few assets are truly cheap anymore.

The rising wealth of Asia only makes this case more compelling.

More importantly, investing in gold will provide you with a diversifier against the AUD, and will reduce the overall volatility of your portfolio, as it is uncorrelated to the equity market, a point we made in our article on the Death of the Australian Term Deposit market, which you can read in full here.

Those portfolio protection characteristics are not to be overlooked in the coming years.

In summary, whilst individuals must make their own mind up as we enter 2014, at ABC Bullion we believe true diversification, including holding a reasonable quantity of physical bullion in your portfolio, will likely continue to reward you in the years ahead, much as it has for the majority of the past decade.

Until next time

Disclaimer

This publication is for education purposes only and should not be considered either general of 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, past performance is not necessarily indicative of future performance.

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