At this week’s SMSF Association Investor Event in Sydney, Perth Mint
Senior Investment Manager Jordan Eliseo discussed the why, the how and the
now of SMSF investing in physical precious metals. We share his insights
below.
Why buy gold?
There are typically five key reasons SMSF trustees invest in physical gold
(and silver).
The first of those is that, like the share market, gold has delivered
quite strong returns over the long run. Some years are obviously better than
others, with gold’s best ever annual return coming in at more than 100% back
in 1979. It has its bad years, too, with the worst ever calendar year return
recorded in 1981 when gold fell by almost 30% in just 12 months.
Putting the best and worst years to one side, and looking at the long run
return, we can see that from the 1970s to the end of 2018, gold appreciated
in value by more than 8.5% per annum.
Of particular interest to SMSF trustees is gold’s historical ability to
perform strongly both when equity markets fall and/or when the “real” cash
rates (which factor in inflation) are low. An asset that has these qualities
can be of benefit to portfolios, particularly those with large holdings in
listed equities, and cash or term deposits, which many SMSF trustees hold.
To help illustrate these points, while gold tends to underperform shares
during years when the share market goes up, in years when the stock market
falls in value, the average return of gold is +15%, benefitting any investor
with bullion in their portfolio.
You can see this in the chart below.
Source: Reuters, The Perth Mint
As a potential alternative to cash, gold has historically come into its
own when real rates are 2% or lower as investors move their money out of bank
accounts and term deposits due to the low returns, and instead invest in
other assets, of which gold is one.
To that end, over the past four and a half decades plus, in years when the
real cash rate has been 2% or higher, gold has averaged a return of only 4%,
with its best and worst years coming in at +29% and -29% respectively.
But during years when the real cash rate has been below 2%, despite having
the odd year of poor performance, including one when it fell 21%, the average
return from gold has been more than 20%. Gold has also historically
outperformed shares and bonds in these years.
This analysis of gold in various real cash rate environments is based on a
detailed study from The Perth Mint completed using Reuters data, with a soon
to be released SMSF whitepaper delving into these issues in more detail.
Finally, gold is simple to buy and store, making it easy to incorporate
into a portfolio, and acts as a hedge against the falling dollar.
All these factors are making the precious metal increasingly appealing to
SMSF investors.
How to buy gold for your SMSF
Depository solutions
Due to their ongoing reporting obligations, it is considered best practice
for SMSF trustees who are investing in gold to use a depository solution.
This option provides a bullion broker to trade metal as well as provide
storage, insurance and ongoing reporting (EOFY valuations) to assist the SMSF
trustee meet their reporting obligations.
The Perth Mint is uniquely suited in terms of the investment solutions it
offers SMSF trustees.
Our depository solutions offer a combination of phone trading and support,
24/7 online trading access, competitive fees, fully insured storage and all
the transactional and valuation data a SMSF trustee requires.
ASX-listed product
Our ASX-listed product (ticker code PMGOLD) is another simple option for
SMSF trustees to use.
Backed by physical bullion, PMGOLD is easy to trade as each unit
represents 1/100th of an ounce of gold.
Therefore, if the gold price in Australian dollars is $1,800 per oz, you’d
expect PMGOLD to be trading at $18 per share. PMGOLD is also competitively
priced, with a management fee of just 0.15%, making it a cost effective way
to buy and hold bullion in your SMSF.
Unique government guarantee
As the only government guaranteed gold depository in the world, all
holdings are guaranteed by our sole owner, the Government of Western
Australia, under the Gold Corporation Act 1987.
Secure vaulting
All precious metal held on investors’ behalf is safeguarded in our central
bank grade vaults, the largest such network in the southern hemisphere.
What the current economic climate can mean for gold
It’s no surprise that gold demand in the US and Europe soared in the
aftermath of the Global Financial Crisis (GFC).
While quantitative easing and fears (so far largely unrealised) of higher
inflation were part of that demand, the other arguably more powerful factor
was the reduction of real cash rates towards or below zero.
As discussed above, investors naturally looked for alternatives in an
environment where their bank deposits were earning nothing - and gold was a
beneficiary. This trend is still in place in the northern hemisphere, and is
now also taking shape in Australia too, with an already record low cash rate
of just 1.50% likely to be cut in the months ahead. Indeed if current market
pricing turns out to be accurate, it’s looking like the cash rate will be
just 1% by mid to late 2020.
Any increases in the cash rate, should they eventuate, are likely to be
incredibly gradual, with 10-15 year bond yields currently suggesting we’ll be
in a low cash rate environment for years to come. Australian savers,
including SMSF trustees, will continue to look for cash “alternatives” in this
market, and we expect gold demand will benefit as a result.
Coupled with historically expensive financial assets, the desire to move a
portion of one’s portfolio into alternative, safe haven investments will
continue to grow.
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.
