Gold’s Mammoth Financial Year Return

Precious Metals Commentary

Gold was swinging in both directions this week hitting highs of US$1,789 and lows of $1,760 before stabilising slightly higher than this time last week at $1,775. Silver took a trip to $18.40 ever so briefly before sharply pulling back to trade just under $18 for now.

Price action remains neutral until we see a clear break of the US$1,800 mark, with many investors watching this level with anticipation.

“Positive” jobs data coming out of the US upset gold’s momentum this week but delving into the underlying numbers the recovery in the US labour market seems a bit dubious. Stock markets rallied and gold sold off on headlines of the US unemployment rate falling to 11.1% after 4.8 million jobs were added.

However there seems to be some disparity with ZeroHedge highlighting the number of insured unemployed is higher than the number of unemployed as reported by the BLS. Regardless, 11% unemployment in our eyes is not a great number so it remains surprising to see the Nasdaq continue to knock out all-time highs again this week.

Continuing with our stock market bubble theme of last week, Tesla eclipsed the market cap of Toyota this week with better than expected Q2 deliveries. The markets appetite for risk is incredible, when you consider Toyota sells around 10 million cars a year versus Tesla’s 400,000 and it just highlights how far traditional methods of valuation have been thrown out the window in favour of future promises.

All-Time (Gold) Highs

This week saw the end of the 2019/2020 financial year, and what a year it has been. With all the turbulence in financial markets gold did what it is supposed to do - provide investors with protection.

The World Gold Council noted that the June closing price for gold of $1,780.96 was the second highest monthly close in gold’s history and not far behind the highest, which was $1,825.55 in August 2011.

For Australian investors this financial year saw repeated all-time highs for gold and in fact if we sort month end closing prices in Australian dollars since 1975, every month of the 19/20 financial year is in the top 12 months!

Gold’s return this year was 28.5% and silver a more than respectable 20.1% and while these are quite impressive, they are far from exceptional if you take a longer historical view.

Below is a chart of the annual returns of gold and silver in Australian dollars since 1975, when it became legal again to own gold.

The charts shows that this year’s return for gold is not that rare – posting an annual return over 10% once every 2.5 years on average. The chart also shows the massive gains in the late 1970s as gold responded to high inflation.

We will admit that the precious metals also post big losses and the returns can be volatile. A better measure is per annum compounded returns as it reflects our view that gold should be a core allocation held over many years as part of a diversified portfolio.

The chart below shows the per annum returns for holding gold and silver depending on the year that an investor bought.

The left of the chart shows that if you bought gold in 1975 and held it for 45 years you would have booked 7.01% per annum return, compounded, and 4.72% for silver.

The key takeaway from the chart is that notwithstanding gold’s volatility, an investor with a long-term approach (our preferred way of thinking about gold) could reasonably expect a 5% p.a. return from gold.

That compares favourably with gold’s main competitor for the “safety” role in a portfolio – cash. While cash is hardly giving any return these days, admittedly it has in the past (and hopefully one day will) consistently returned 5-6%.

We would never suggest entirely replacing your cash allocation with gold. However, it is worth noting that interest payments on bank deposits are taxed each year at your marginal tax rate whereas gold’s returns are allowed to compound and benefit from the 50% discount on capital gains.

The chart also shows that silver can also post good long-term returns but it is a lot more volatile than gold, suggesting that it is more suited to tactical allocations when it is historically undervalued (as the gold:silver ratio suggests today).

All-Time (Employment) Lows

Gold’s big return this year beg the question of whether it can continue such returns going forward. Our view is that the economic outlook is far from clear at this time with interest in gold in its early stages.

US investment advisory firm Real Investment Advice posted the chart below which shows just how bad the current situation is compared to previous recessions. Based on a conservative reading of this chart we are at least 2 years away from getting back to where we were pre-COVID.

Real Investment Advice note that the last four recessions required longer and longer periods for jobs to recover. Their explanation for this is that central bank low/zero interest rate policies have encouraged speculative investment rather than the productive investment that is what would drive a recovery in employment.

In their analysis, the US economy “will not regain pre-COVID output levels until sometime in the 2030s … might also imply continuing civil unrest and potentially war” and that collectively we have two choices:

• “we can recognize the problem and force change by electing like-minded legislators” (which in our view is unfortunately unlikely on a number of fronts) or

• “we can stand aside”.

Under that assessment gold will still have a role in the years ahead as in financial terms the pre-eminent “stand aside” asset is gold.

All-Time Underowned

While gold is booking near 8-year highs in US dollars and all-time highs in Aussie dollars, investor allocations are well below the peak they reached during gold’s bull run to 2011, as shown in the chart below.

If Chancery Asset Management’s Thomas Puppendahl is correct, those allocations will get back up to 8% or more as he says we are “still in the early stage of this next bull market, which is probably going to be the most violent and in percentage terms biggest bull market since it began in 1999-2000”.

We like, as we are sure you do, those to-the-moon price predications and Thomas doesn’t disappoint, saying he expects $3,000-$5,000 gold and $50 silver but he is extra bullish, seeing that happening within the next three years!

US$3,000 by a conservative 0.70c Aussie = A$4,285. We will save you the calculation and say that June 2020 closing price of $2,589 to $4,285 in three years is 18.3% compounded. Don’t knock us for dreaming.
 
Until next time,

John Feeney and Bron Suchecki
ABC Bullion
 
If you have any questions or feedback about this week’s report, we would love to hear from you. You can contact John Feeney (@JohnFeeney10) and Bron Suchecki (@bronsuchecki) directly on Twitter, otherwise please feel free to send us an email at [email protected], or call us during trading hours on 1300 361 261.
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.