Much of the developed world, including Australia, has experienced low interest rates since 2009 when monetary authorities introduced cuts to stimulate economic growth following the global financial crisis.
In Australia, interest rates reached a record low this year when the reserve bank reduced its cash rate to just 1.00% in July.
The decision to leave this rate unchanged in August and September on the back of continued uncertainty about the world economy has suggested interest rates will remain low for the foreseeable future.
Indeed, market predictors expect the Reserve Bank of Australia (RBA) to cut rates further to just 0.75% before the end of 2019.
What does this mean for investors?
In today’s low interest rate environment one of the most topical issues for many investors is what to do with their cash holdings.
With 56% of Australian investors holding cash, according to Australian Tax Office data, this issue will have been brought into sharp focus for many.
Given the latest set of Australian inflation data suggests prices across the nation are rising at 1.60% per annum, much of the money sitting in cash is losing value once real interest rates are considered.
Real cash rates are calculated by subtracting the official inflation figure from the RBA cash rate. As an example, with the RBA cash rate at 1%, and annual inflation currently at 1.60% per annum, the real cash rate is -0.6%.
Moreover, the fact that 10 to 15-year Australian government bonds yield between 1.25% and 1.50% suggests this period of low returns on cash or cash-like assets may well continue for another decade or more.
In such an environment many investors are considering gold as a safe haven thanks to the asset’s historical outperformance when interest rates are low.
Real cash rates and gold
More than 45 years of market history tells us gold has typically delivered strong returns when real rates have been low.
In Australia between 1971 and 2018 there have been 27 years when real cash rates were 2% or higher and 21 years when they were 2% or lower.
The table below highlights the returns on cash and gold, in both nominal and real terms, during these periods.
Real cash rates between 1971 and 2018 
Source: The Perth Mint, Australian Bureau of Statistics
As can be seen, in environments where the real cash rate was above 2%, gold rose in nominal terms by an average of 4.32%. It therefore underperformed cash, which during these times rose by an average of more than 9%.
However, in years when the real cash rate was below 2%, the price of gold rose by more than 20% in nominal terms and by almost 14% in real terms. Additionally, it rose during 18 of the 21 years when the real cash rate was below 2%.
Gold has not only performed strongly in absolute terms when real cash rates have been low, but on a relative basis as well. The yellow metal outperformed both stocks and bonds during the years when real cash rates were below 2%.
This can be seen in the graph below, which plots the nominal and real returns for Australian stocks, bonds and gold during years when real cash rates were below 2%.
Australian asset class returns when real rates are below 2% 
Source: The Perth Mint, Australian Bureau of Statistics
It should be no surprise that gold would perform so well during periods when real cash rates have been low for two key reasons:
- Low or even negative real cash rates are typically only implemented as a form of monetary stimulus when the economy is weak or softening. In such environments it’s natural that investors adopt a more defensive approach by seeking out safe haven assets such as gold.
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If the real rates one can earn from cash or short-term bonds are low, or even negative, the opportunity cost of investing in gold is significantly reduced.
It therefore makes sense that historically no other single, easily accessible traditional asset has delivered higher returns than gold in environments where real cash interest rates have been low.
