Why investors are taking a shine to yellow metal

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As a start-up owner, entrepreneur or professional there will hopefully come a time where we look for investment options and ways to keep our money safe while having it benefit us in the long term.  Aeona had the opportunity to get some insights from Jordan Eliseo from ABC Bullion about Gold investing options and their advantages over other investments.

Jordan Eliseo is a much sought-after and respected financial commentator and economic analyst with close to 20 years experience in the financial sector. After working for some of the biggest names in the global financial marketplace including Deutsche Bank, JP Morgan and AMP Capital, Jordan has amassed a wealth of experience analysing investment markets.

See what he had to say about investing in gold below:

The price of gold in Australian dollars has risen by over 10% per annum for the last 10 years, outperforming all other asset classes, including shares, cash and even property.

The strong price rise has been driven by a number of factors and has led to a noticeable increase in investment demand for the yellow metal. In Australia, this demand is being led by SMSF Trustees, who now number over 1 million people, and who collectively control the better part of $600 billion in retirement savings.

There have been a number of factors driving this demand, including:

  • Low interest rates: Gold is essentially another form of money and is traded alongside currencies amongst the world’s largest banking institutions. Whenever ‘real’ interest rates (which take into account the impact of inflation) are low, gold prices tend to rise strongly, as investors become more attracted to the yellow metal. In Australia, the average return for gold in years where ‘real’ interest rates were 2% or lower (like they are now), is over 24%, which compares very favourably to shares which were up only 13% in the same years.
  • Diversification: Gold is uncorrelated to the equity market and indeed most financial markets where investors concentrate their portfolios. As a result, anyone who invests in gold tends to have a ‘smoother’ investment experience as losses in equity markets are typically offset by gains in the gold market. This is even more pertinent when markets go through serious periods of volatility, with gold being by far the best performing liquid asset in the periods where equities fall fastest. As a way of visualising this, consider that in the worst 10 calendar quarters sine 1972 for the stock market, shares have fallen by over 15% on average. Gold on the other hand rose in 9 out of those 10 periods when the market was crashing, registering an average gain of 8.6%.
  • Currency Hedge: Many investors are worried about the potential for the Australian dollar to fall in the coming years. It has already fallen some way, but with the local economy facing the biggest headwinds in decades it could have a long way to go, with some forecasters seeing the AUD falling as low as USD $0.50, which is the level it traded at the start of the new millennium. As gold is priced in USD, any depreciation in the local currency means the AUD gold price rises, benefitting SMSF Trustees & Investors with money in the yellow metal.
  • Inflation and Crisis Hedge: Gold has always been well recognised as a crisis and inflation hedge. Whenever there is volatility in financial markets, or rising geopolitical tensions in the real world, safe haven assets like gold are sought, with the yellow metal typically proving a very effective investment hedge. It also does well in periods of high inflation, with data suggesting that the average return for physical gold in years of high inflation (where inflation was 5% or higher) is over 15%. That is far better than financial assets tend to do in similar environments

Also helping support gold demand, and gold prices, has been the unprecedented level of buying that is coming from countries like China and India. Collectively, these two nations, plus other smaller countries in Asia and the Middle East, now account for well over 2,000 tonnes of annual physical gold demand, which is some 70% of the total amount mined in any given year.

Back in the 1970s, these regions accounted for less than 30% of total gold demand, testament to the growing wealth of emerging markets.

Finally, central banks are back in the gold buying game. Many people are not aware that central banks are still huge holders of gold, collectively owning over 30,000 tonnes of the yellow metal.

Since the Global Financial Crisis (GFC) hit back in 2007/2008, these banks have rediscovered their appetite for gold buying, and they are now collectively purchasing well over 500 tonnes of physical gold a year.

With global debt levels markedly higher than they were when the GFC hit, cash rates at record lows, weak economic growth and the continuation of quantitative easing by some of the worlds largest central banks, there are many reasons to expect gold prices to appreciate further in the coming years.

More importantly, physical gold will continue to act as an excellent hedge, one that is highly liquid and easy to trade in. That simplicity is likely to continue to attract prudent SMSF (and other) investors, many of whom have worked a lifetime to build a pool of wealth that they now wish to steward through their golden years (no pun intended).

And despite some misconceptions, the gold market is not opaque, nor expensive or difficult to trade in. Accounts with bullion dealers can be established in a matter of minutes, with ongoing storage and portfolio valuations and reporting provided.

One need not be a multi-millionaire to invest in the gold market either. Trustees & Investors can buy products as small as ½ ounce (for less than AUD $1,000), up to gold cast bars that are 1 kilo in size, and come with their own serial numbers and assay certificates, guaranteeing purity.

When it comes to the cost of trading in these kilo bars (which are the product of choice for our many SMSF clients), the margin is just 1%, with the bars currently costing very close to AUD $50,000.

Summary

As should be clear, the physical gold market is incredibly easy to trade in, and is accessible to all investors, including SMSF Trustees, many of whom are attracted to the simplicity and tangibility of physical gold, as well as the many attributes it offers a well rounded investment portfolio.

And with a number of factors likely to push prices higher in the coming years, it could well be the goose that lays the golden egg (pun intended this time) when it comes to generating higher returns in your portfolio.

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.

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