Gold for Australian Investors - Market Update 29th July

On Tuesday night, ABC Bullion hosted a sold out seminar; “The New Bull Market in Precious Metals”, in front of over 600 existing and new clients, as well as an assorted mix of finance professionals and media at the Ivy Ballroom in Sydney, NSW.

We had key-note speeches from Jake Klein, the Executive Chairman of ASX listed gold Evolution Mining, as well as Tom Rachcoff from Cor Capital Pty Ltd, a diversified investment portfolio with a strategic holding in physical gold bars.

In this week’s market update – we’re going to highlight what we believe some of the takeaways from the night were, and discuss possible price targets for precious metals in the next few years.

Overview
The rally in gold this year, plus the strong performance of the XGD has put gold mining well and truly ‘back on the map’ this year for investors, many of whom are having to navigate volatile equity markets, negative real yielding bond markets, and ever lower interest rates.

With that as a backdrop – it’s no surprise that the first point Jake Klein from Evolution wanted to share was “Gold is here to stay”, and that its importance as an investment will endure.

Jake also spoke passionately about just how fantastic a place to mine gold Australia really is, with a handful of supporting factors. He noted that Australia is the world’s second largest gold producer (with production of circa 280 tonnes, valued at close to AUD $15bn), that we have a high quality workforce, and that Australia is a first world mining jurisdiction. With the AUD gold price at or near all time highs, it’s no surprise that cash margins are strong in the industry – and we are certain investment into the sector will continue to flow.

The size of the Australian gold industry is something we refer to now and again when discussing our outlook for the local economy – as it is a significant commodity earner, and employer, with some 50,000 Australians working in the sector, or in jobs supported by the gold industry.

To that end, we were delighted to have the Honorable Anthony Roberts, NSW Minister for Industry, Resources and Energy speak after Jake Klein, with a discussion around the importance of the gold sector to the entire Australian economy, and its strong performance these days.

The Minister was also kind enough to introduce a short video we showed on the night, detailing the production of the Emirates Melbourne Cup, which ABC Bullion and Pallion (our parent company) is incredibly proud to manufacture – using gold from sourced from the Evolution mine and Cowal (see image below), with the refining taking place at the LBMA accredited ABC Refinery.

After that – my colleague Nick Frappell and I did a talk on Gold for Australian Investors, looking at the fabulous returns the sector has offered for the last 15 years, why we think the bull market has further to go, and the important role it can play for local investors today.

Nick took care of some of the macro and technical factors, looking at Chinese overcapacity and the explosion in debt there, the madness that is negative yielding sovereign debt and negative interest rate policy, and the rise in political uncertainty, best witnessed by the recent Brexit vote, and the ever shortening odds on a Trump presidency.

The situation is undoubtedly serious – meaning you’ve got to either laugh or cry about it, with the good people of Italy looking like they’ll go with the former, if the rise of the Five Star Movement, run by one-time comedian Beppe Grillo is anything to go by.

Nick – whose spent the better part of 30 years in precious metals, and was head of precious metals trading at Triland Metals and Vice President of precious metals marketing at Mitsui & Co. Precious Metals Inc, is also an expert technical analyst, and looked at a number of charts which reinforced the viewpoint that the secular bull market in precious metals has re-commenced.

A declining gold-silver ratio was one of them, with the ‘little cousin’ of the precious metal complex likely to outperform the yellow metal in the years ahead, though it will undoubtedly be more volatile.

After that I covered a few reasons why gold and silver, which have been mainstay assets in my own portfolio for over 10 years, remain such a crucial holding for me, and why I think they are such important assets to own.

One of those is obviously the historical performance of gold in low ‘real’ interest rate environments. It is unsurprising that gold tends to do well when the income one earns on term deposits and bank accounts is low (on an inflation adjusted basis), as the opportunity cost of owning non yielding gold declines.

Interestingly, not only does gold tend to do well on an absolute basis in low ‘real’ rate environments, but on a ‘relative’ basis as well, with the metal outperforming stocks and bonds, as the image below highlights.

We also touched on the diversification benefits of gold, noting that it acts to reduce volatility, and improve risk-adjusted returns. Those are important attributes at all times, but never more so than now, when traditional assets like stocks and bonds are at or near all time highs. To visualize just how high, consider the chart below, which came from Bloomberg recently.

Owning an asset that is uncorrelated to these two primary asset classes is vitally important, and nothing has played a better role in protecting wealth when equities are volatile than gold bullion, yet another reason to own the asset.

The final aspect I discussed regarding the merits of gold investment was its simplicity. Gold is tangible, highly liquid, easy to transact in, and to store. That simplicity is a benefit. Everyone can buy gold!

Hypothetically, maybe there are better “risk off assets”, maybe a hedge fund or some complex algorithmic trading system that only a PHD quant can understand, let alone hope to execute. Even if they do exist, we have no doubt they’d be opaque, expensive and possibly illiquid.

Those aren’t the qualities the average investor looks for, and for that reason, sticking with physical gold and silver bullion is a much better bet, for me at any rate.

Following my talk, we were delighted to have Tom Rachcoff from Cor Capital speak. The title of Tom’s talk; “Why do investment advisors ignore gold bullion?”, looked at the fact that today, asset allocators in institutional portfolios around the globe have less than 1% of their funds in physical gold bullion.
 
Tom also produced some excellent charts and analysis on the complexity that some asset managers incorporate in their clients’ portfolios, all of which is supposed to diversify one’s asset class exposure.

Asset classes obviously include the vanilla (Aussie and global equities and fixed income), but also the more opaque, including private equity, distressed debt, convertible arbitrage, special situations, buy/write yield enhancement etc etc.

Expressed graphically – investors think they are buying this.

The problem with all this is that the vast majority of these asset class exposures are correlated, especially in terms of market stress, meaning investors are short volatility, correlation and dispersion (i.e. they will be caught out by these factors).

Expressed graphically – investors are actually buying this.

The key takeaway from this is that investors really need to pay attention to what they are exposed to in a portfolio, and ensure they have true asset class diversification – not just a heap of different exposures that are positively correlated.

Physical gold – which of course is uncorrelated to stocks and bonds, and highly sought after in times of systemic stress – plays this role when appropriately combined with financial assets as well if not better than any other asset.

The other really interesting point that Tom highlighted was just how damaging volatility is to investor returns, due to the impact that emotions have on peoples decisions to buy and sell (often at the wrong time).

To help visualize this – consider the table below – which shows average market returns, and average investor returns in three asset classes, over various time periods.

As you can see – in all cases, investors typically underperform the actual asset they are investing in meaningfully.

To further illustrate just how damaging volatility, and its impact on investor emotions can be to returns, consider the following (frankly astonishing) point Tom made in his talk, referring to the US Fidelity Magellan Fund managed by Peter Lynch from 1977 to 1990.

The fund could hardly have had a better run over that period, rising by 29% per annum on average, the number one equity fund in the world, no doubt the reason it grew in size from $18m to $14bn.

You’d think investors in it would have been earned life changing wealth - as a $100,000 investment compounded at 29% for 14 odd years should turn into $3.5m
On paper – happy days, but a study by Fidelity itself, showed that a shocking percentage of investors in the fund, during Lynch’s tenure, actually lost money. As Tom pointed out, that seems impossible to comprehend, …annual average +29%pa...with the average investor out-of-pocket – but it happened.

The lesson from all of this – controlling volatility is important.

Investment solutions
Product sales don’t form a regular part of our market updates – but as this market update is a review of the seminar we just hosted, it would be remiss of me not to mention the investment solutions that ABC Bullion now offer our global client base, especially as these products have been built in response to client demand and surveys we’ve conducted with our highly engaged database.

I understand that many readers are obviously already clients, so some of this may be familiar, but for those who are yet to invest in precious metals, or for those of you that are looking to increase your exposure, then ABC Bullion now offers:

• 24 hour two way trading in precious metals through our website, with account opening available in just 1 minute at this link here

• The ABC Bullion Gold Saver, Australia’s first fully automated direct debit physical gold and silver accumulation plan, which you can read about here

• A global vaulting solution, which allows any client – irrespective of where they are located in Australia or overseas, to trade through ABC Bullion, with private vault storage in a non-bank vault in Sydney Australia. You can learn more about that here

• We’ve also being doing a lot of work in the Superannuation space, which is a vitally important financial asset for the vast majority of our Australian client base. Those of you with a SMSF may be interested in reading our recent annual SMSF and physical gold investment guide

• For those of you without a SMSF, we’re also really excited that, through brightday Complete Super, you can now access investment into the Cor Capital fund, a professionally managed truly diversified fund with a strategic allocation to physical gold bars traded and stored with ABC Bullion. That is an Australian first, which you can read about here

​Finally, we used the event to launch our new book, Gold for Australian investors, the first book of its kind to look specifically at the performance of AUD gold, and the vital role it can play in an Australian investor's portfolio.

We are now selling this through our website. At last check, the price was AUD $26.30 per book. It moves – as we are selling it of the exact equivalent of 1 troy ounce of silver. You can find out about it here

Summary
There were a lot of important points contributed on the night, but for me, the key takeaway from the night was made by Evolution Chairman Jake Klein.

Put simply, Gold is here to stay!

Despite the naysayers – its role as the ultimate store of wealth and as humanity’s premiere currency is as relevant today as it has ever been, and the metal continues to plays a critical and unique role in the portfolio of any well balanced investor looking to protect and grow wealth.

Until next time,

Jordan Eliseo

Chief Economist
ABC Bullion

Disclaimer
This publication is for educational purposes only and should not be considered either general or personal advice. It does not consider any particular person’s investment objectives, financial situation or needs. Accordingly, no recommendation (expressed or implied) or other information contained in this report should be acted upon without the appropriateness of that information having regard to those factors. You should assess whether or not the information contained herein is appropriate to your individual financial circumstances and goals before making an investment decision, or seek the help the of a licensed financial adviser. Performance is historical, performance may vary, and past performance is not necessarily indicative of future performance. Any prices, quotes, or statistics included have been obtained from sources deemed to be reliable, but we do not guarantee their accuracy or completeness.