Summary
•Gold and silver prices rallied strongly in the final month of 2019, up 3.63% and 4.76% respectively in USD terms.
•For the full calendar year, gold rose 18.26% in USD terms and 18.86% in AUD terms, outperforming silver which was up 15.18% (USD) and 15.98% (AUD).
•Gold price gains in 2019 were driven by multiple factors, including interest rate cuts in the US and Australia, declining bond yields globally and escalating geopolitical tensions.
•Demand for precious metals was driven by record central bank purchases and inflows into gold ETFs hitting an all-time high in 2019.
•The gold price rise of the past 12 months is particularly impressive given the strength of global equity markets, with the US stock market up 29%, and the ASX up 18% in 2019.
•Outlook for 2020 is positive as multiple tailwinds support demand.
Full monthly review – December 2019
Gold finished 2019 on a positive note, rallying by more than 3.5% in December in US dollar (USD) terms. The rise was in part driven by USD weakness, with the dollar index falling by almost 2% last month. Over the course of the 2019, gold rose from USD 1,282.73 to USD 1,517.01 per troy ounce, an increase of 18.26%.
In Australian dollar (AUD) terms, returns for gold in December were essentially flat, with the yellow metal rising by 18.86% for 2019 and marginally outperforming silver which increased by 15.98% across the course of the year.
Gold’s strong performance in 2019 represents a continuation of an uptrend that began in earnest at the start of Q4 2018 when the yellow metal was trading below USD 1,200 per troy ounce. Equity market volatility in the last three months of 2018 was a key driver of the gold rally that continued throughout 2019 even as equity markets themselves recovered strongly.
Recession fears in the US, a meaningful decline in global bond yields, monetary easing from central banks and concerns over the US-China trade war combined to bolster demand for the precious metal pushing prices higher.
The rally in gold during 2019 was particularly impressive given how well the stock market performed, with the S&P 500 up by 28.88% last year and the ASX increasing by 18.38%. Many investors see gold as a safe-haven asset, even though market history indicates that it is often positively correlated to equity markets when those equity markets are rising strongly.
This can be seen in the chart below, which highlights the annual returns of the ASX 200 and gold priced in AUD from 1993 to 2019 inclusive.
Source: Reuters, The Perth Mint
The ASX 200 recorded negative returns in seven of the 26 calendar years across this time period, with gold rising in six of those years. In the 20 years that the ASX 200 delivered positive returns, gold priced in AUD increased in 14.
This includes last year which helps to highlight why gold may play a positive role in an investor’s portfolio in all market conditions and not only during periods of high inflation or equity market weakness.
Demand for gold was also strong in 2019, particularly in the exchange-traded fund (ETF), private investor and central bank space. We explore this in detail below.
Gold ETF buying strong – particularly in Australia
December 2019 capped on an impressive year for global gold ETF flows, with preliminary estimates from Reuters suggesting that holdings grew by more than 2.5% during the month.
Across the year, holdings in global gold ETFs increased by 14%, with the total tonnes of gold held through these vehicles hitting 2,896 tonnes in October 2019. This represented a new all-time high, surpassing levels last seen in December 2012 when gold was trading closer to USD 1,664 per troy ounce.
The Perth Mint has seen the growth in demand from ETF buyers firsthand, especially through the growth of our ASX-listed exchange-traded product, ticker code PMGOLD. Holdings in PMGOLD grew by more than 45% across the course of 2019, with inflows seen across 11 months a testament to the ongoing demand for gold we have seen from Australian investors.
Private investor demand
Investor interest in gold hasn’t been confined to ETF inflows. Private holdings held in custodial storage have also seen significant growth. Research released by Goldman Sachs in late 2019 suggested that up to 1,200 tonnes of gold has been purchased and privately vaulted in countries like Switzerland and the UK across the past three years.
Central bank purchasing
Another key source of demand in 2019 came from central banks which have been net purchasers of gold for a decade now. By the end of Q3 2019, central bank demand had hit 574.5 tonnes for the year, with further acquisition taking place in Q4.
Whilst the total amount of gold purchased by central banks for the entirety of 2019 is not yet known, current estimates suggest that it will be almost 670 tonnes. This would be a record for any given calendar year, surpassing levels seen in 2018 when just over 650 tonnes of gold were obtained by central banks. This number at the time represented the fastest pace of gold acquisition in five decades.
Outlook for 2020 and beyond
Whilst short-term gyrations in the gold price are inevitable, we remain optimistic about the outlook for gold and precious metals generally as this decade gets underway with demand likely to be supported by several tailwinds.
At a central bank level, whilst the rate at which banks acquire gold may ease from record levels seen across the past two years, there seems little question that they will remain net buyers. Geopolitical tensions and low-to-negative real yields are expected to continue to encourage reserve asset diversification into gold.
Gold is also likely to find favour amongst institutional investors, with the recent Goldman Sachs research report noting that analysts: “
still see upside in gold as late cycle concerns and heightened political uncertainty will likely support investment demand.”
Importantly, Goldman also suggested that: “
The case to reallocate a portion of normal bond exposure to gold is as strong as ever”. This is a theme we expect will support demand for gold for much of the decade to come, as in today’s environment, there is simply no real return, and in many cases guaranteed losses (if the assets are held to maturity) on many traditional safe-haven assets.
This is demonstrated in the chart below, which shows yields on cash and a variety of fixed income investments (as at 30 November 2019) and compares them to average inflation rates of the past decade.
Source: Bentham Asset Management, Livewire Markets, The Perth Mint, Australian Bureau of Statistics
Given a choice between negative real yields or the opportunity to gain from potential increases in the gold price, we believe it is only natural that an increasingly number of investors will choose the latter option by incorporating an allocation to gold in their portfolio, much like they did in 2019.
This is just as likely in Australia as it is in other parts of the world, with multiple factors supporting gold demand locally including:
•Prolonged softness in the local economy
•The potential for further house price weakness in some parts of the country
•The likelihood that interest rates will be cut again this year
•Continued concerns about a potential decline in the value of the Australian dollar
These factors represent a compelling case for risk-conscious investors to consider gold as part of their portfolio as the asset’s safe-haven attributes come to the fore in the years ahead.
Disclaimer Past performance does not guarantee future results.
The information in this article and the links provided are for general information only and should not be taken as constituting professional advice from The Perth Mint. The Perth Mint is not a financial adviser. You should consider seeking independent financial advice to check how the information in this article relates to your unique circumstances. All data, including prices, quotes, valuations and statistics included have been obtained from sources The Perth Mint deems to be reliable, but we do not guarantee their accuracy or completeness. The Perth Mint is not liable for any loss caused, whether due to negligence or otherwise, arising from the use of, or reliance on, the information provided directly or indirectly, by use of this article.
Articles referenced
Bloomberg article referencing Goldman Research
https://www.bloomberg.com/news/articles/2019-...-strong-as-ever
Zerohedge on Goldman Sachs Research
target="_blank"
https://www.zerohedge.com/crypto/road-reti...an-says-go-gold
World Gold Council on Central Bank Demand< target="_blank"br>
https://www.gold.org/goldhub/research/g...er-institutions
Kitco on Central Bank Gold Dema target="_blank"nd
https://www.kitco.com/news/2019-12-0...ear-record.html
Deccan Chronicle on Central Bank Gold B target="_blank"uying
https://www.deccanchronicle.com/b...ince-1970s.html
