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I previously wrote about gold around six months ago in August 2019 – however, given the speed at which things are moving in the markets, and the demand we are seeing in our Gold ETF, QAU, I thought it would be useful to provide some updated commentary. Gold has been on a strong run since the start of 2019, with the precious metal rising by 28% in USD terms over this period. The gold price has risen more than 8% in 2020 alone (to 22 February). Whilst this has primarily been driven by concerns around growth, US-China trade tensions, and the Coronavirus, as well as falling interest rates, we believe there is still a strong case for including gold as part of a broader asset allocation.
Gold price, USD/oz, 1/1/2019 – 22/2/2020
Source: www.goldbroker.com. Past performance is not indicative of future performance.
1. Negative-yielding bonds
The fall in interest rates around the world shows no sign of reversing, as central banks continue to ease monetary policy. In the last week of January, the pool of securities with a yield below zero surged by $1.16 trillion, the largest weekly increase since at least 2016 when Bloomberg began tracking the data daily1. There is now more than US$12 trillion in negative-yielding debt worldwide, down from the record high mid-last year, but the highest it has been in two months.
Gold could continue to find favour given this globally-synchronised trend. With interest rates at record lows, the opportunity cost of holding gold has also fallen.
2. The Coronavirus and U.S.-China trade tensions
The main impetus for investors rushing to put their money in bonds was the Coronavirus, with fears escalating as the virus spread further. As of 25 February 2020, the virus had infected almost 80,000 people and killed more than 2,600. Aside from the human impact, investors are increasingly worried about the effect on companies and economic growth.
Sharemarkets around the world are suffering sharp pullbacks on news that the virus has taken hold in countries, including South Korea and Italy. Over the course of two days, markets (including in the U.S.) fell around 5%. Locally, investors were not immune from the jitters, with the Australian sharemarket (on 25 February 2020) having its worst day since October 2019.
On another front, while investors welcomed the Phase 1 agreement reached by China and the U.S., trade tensions continue to linger, leaving investors nervous. With growth worries likely to persist, gold prices could rise further.
3. Central bank buying
Central banks added 650 tonnes to official gold reserves in 2019, the second highest level of annual purchases for 50 years, just 1% less than 2018’s record year. This marked the tenth consecutive year of net purchases by central banks. Emerging markets, in particular Turkey, Poland and Russia, led demand, while Chinese buying accounted for nearly 100 tonnes2. The high level of central bank demand has provided strong support for the gold price.
Gold is one of the easiest USD-denominated assets to own, particularly while a local currency depreciates. With this in mind, more central banks may decide to add gold to their portfolios.
Central bank net gold purchases, 2000 – 2019
Sources: Metals Focus, Refinitiv GFMS, World Gold Council
4. Portfolio diversification
We believe that gold is currently in a sweet spot as a portfolio diversifier.
While global sharemarkets have continued to rise in the early 2020 (noting of course the heavy losses sustained in the last few days), there have been warning signs around U.S. economic growth. Apple recently issued a warning of disruptions to both Asian sales and production, and there were surprisingly sharp drops in U.S. service and manufacturing indices in February. Some are also warning that markets are not fully factoring in the likely negative hit to Q1 earnings from the Coronavirus. Investors are also keenly aware that the U.S. has now completed a decade without recession, a trend that, while welcome, is unlikely to continue indefinitely.
In an uncertain environment, investors historically have often turned to gold as a safe haven. If investors see less upside for equities, based on the expectation that slowing economies will start to have an impact on earnings, gold may well be a beneficiary.
How to gain exposure to gold
The historical positive correlation between the AUD and gold could generally favour a currency-hedged exposure in a rising gold price environment. Furthermore, we believe that in the current environment, it could make sense to remove the uncertainty of currency risk and to play gold price movement via either currency-hedged gold bullion or currency-hedged global gold miners.
- Physically backed by gold bullion held in a segregated account with a third-party custodian – bullion bar list issued by JP Morgan is published on our website.
- The only $A-hedged gold ETF solution available in the Australian market – i.e. ‘purer’ exposure to USD gold prices.
- 1-year performance: 17.6% (to 31 January 2020).
BetaShares Gold Bullion ETF – Currency Hedged (ASX: QAU) vs. S&P/ASX 200 Index, 1/1/2019 – 21/2/2020
Source: Bloomberg. Past performance is not indicative of future performance.
- Provides $A-hedged exposure to the largest global gold mining companies (ex-Australia).
- Diversification away from concentrated Australian gold mining sector which makes up only 10% of the global gold mining market.
- 1-year performance: 43.9% (to 31 January 2020).
Past performance is not indicative of future performance.
1. Source: Bloomberg
2. Source: www.gold.org