Australian dollar gold investors have had a great start to the New Year. Underlying strength in the precious metal market, predominantly driven by safe haven buying in response to the shock Swiss National Banks decision to unpeg the Franc from the Euro, has seen the USD price for gold trade back toward USD $1300oz.

For local investors, they’ve had the added bonus of a continuing fall in the Australian dollar, which is now trading below USD $0.80, helping send AUD gold prices to $1590oz at the time of writing.

In the last 3 months alone, AUD Gold has risen by just short of $300 per ounce, or over 15 per-cent, with local investors in physical bullion having now recovered all the losses they were sitting on when gold first fell out of bed back in April 2013.

The more contrarian ones used that correction as a buying opportunity and topped up their gold holdings, a smart move in light of the fact physical gold has outperformed shares, cash and bonds in the past 10 years, and by a considerable margin too.

Why the Recent Rally

Whilst the Swiss National Bank decision was the major catalyst for gold’s recent rally, a number of other factors have also helped tilt the balance towards a more favourable gold price outlook in the past few months.

Firstly, yields the world over have been plummeting, with 10 year government bonds in the United States and Germany now yielding just 1.82% and 0.34% respectively.

That is a substantial decline from a year ago, when yields were closer to 2.78% and 1.7% in these two countries, and has been supportive of the gold market as lower yields imply a lower ‘opportunity cost’ of investing in bullion, in terms of income foregone.

Political uncertainty in Greece, which the market began pricing in well before last weekends election of the ‘anti-austerity’ Syriza party in Greece, has also been a factor, whilst Mario Draghi’s Trillion dollar plus European QE plan shows that we are still ensconced in an era of monetary debasement.

Finally, plunging commodity prices (especially oil), have caused many to wonder whether or not the Federal Reserve really will be able to raise interest rates this year as originally planned, as inflation figures are already ‘uncomfortably low’, not only in the United States, but around much of the developed world.

Compounding all of these factors is rising concern about the validity of the ‘economic recovery’ story, with Europe skating along the edge of a triple dip recession, Abenomics in Japan increasingly looking like a busted flush, and the Bloomberg US macro surprise index starting 2015 with it’s lowest reading in over a decade.

Sadly this could deteriorate further this year, especially in light of the challenges the US oil industry is now faced with.

As a result, whether it be due to declining yields, concerns over monetary policy and political stability in Europe, or just broader concerns about slowing economic growth, it is no surprise that physical gold has caught a strong bid in the past couple of months.

It’s not all about inflation

If the gold bull market of the past 13 years has taught investors anything, it’s that rising gold prices are not dependent on higher inflation alone. Indeed since the turn of the century, official inflation rates have been falling, with US inflation, which was 3.36% back in 2000 averaging just 1.60% per annum in this ‘post GFC’ environment.

It has been a similar story in Australia, with official CPI figures for end 2014 coming in at just 1.7% for the year, a noticeable decrease compared to the 4.5% reading we saw in the year 2000. If gold were merely just an ‘inflation hedge’, then it makes no sense that we’ve seen prices more than quadruple in what has been not only a historically low, but falling inflation environment.

Instead, gold prices have been supported over this period by heightened geopolitical uncertainty (Sept 11, Iraq War, Crimea), and greater market volatility (NASDAQ crash, GFC), with the potential for higher inflation merely the icing on the cake.

This bodes well for considerably higher gold prices between now and the end of the decade, especially as the other two traditional safe haven asset classes, government bonds and cash, are already offering negative real returns in most in the developed world, a sad fate that is inexorably finding it’s way down under.

Pro cyclical consumer demand for gold bullion, particularly out of India, China and the Middle East will also prove provide continued support, with ‘Eastern’ buying already accounting for circa 70% of annual physical gold demand, a dramatic increase over the past few decades.

With that in mind, the last three months may be a sign of what’s to come for Australian dollar gold investors in the years ahead. Not only will they benefit from the resumption of gold’s USD bull market, but further rate cuts here should see the AUD weaken further, adding to gains for local investors.

Bottom line: Apart from providing diversification against a richly priced share-market, and a natural currency hedge, holding physical gold as a core asset in a portfolio is likely to be highly rewarding in the coming years.