The following is an edited extract from ABC Bullion's new book, “Gold for Australian Investors”.
What are the eight key reasons why Australian investors should look at investing in physical gold as part of their investment portfolio? Here is the first.
1. Gold has demonstrated strong long-term returns in its own right
Number 1 is the fact that gold has delivered very strong long-term returns in its own right, since the 1970s.
Whilst growth assets such as shares should be expected to outperform precious metals in the long run, the performance of physical gold over the past forty-plus years has been very solid. This is clear when looking at the following returns table which highlights short, medium and long-run returns for gold, as well as traditional growth assets such as Australian and international shares.
Asset Class Returns to end December 2014 (%).
Source: ABC Bullion, IRESS, Cor Capital, Chant West, performance is gross of fees
The reason we use this time period as our definition of “long-run” is that up until August 1971 physical gold and US dollars - and, by definition, all currencies - were essentially interchangeable at a fixed price. Therefore, in the table above, we are looking at the return on gold, in Australian dollars, for the entire period that we have been off a monetary standard underpinned by physical gold.
Note that the returns seen in the table above, which are denominated in AUD, apply to investors in the majority of developed markets. From the start of 1970 to the end of 2014 inclusive, gold prices in USD rose by 8.4% per annum. Since the turn of the century, they’ve increased by 10% per annum in USD terms, with similar results in GBP.
The increase in the price of gold, whilst outperforming official inflation since the start of the 1970s, has more or less tracked the average growth in the money supply over this period. Data from the World Bank suggests global money supply has been growing at around 11% per annum since the 1970s, whilst data from Incrementum AG and the St Louis Federal Reserve suggests that the monetary base in the United States increased at an annualised rate of 9.95% between 1971 and the end of 2013.
Whilst gold prices have not appreciated as much as equities since 1971, a return of 9.0% per annum over more than four decades is exceptionally strong for a highly liquid monetary asset with zero credit risk.
The returns are even more impressive when one factors in the substantial portfolio diversification benefits physical gold has offered investors along the way, a topic we will delve into when we look at the correlations between gold and financial assets, and gold’s historic performance in “risk off” environments.
It should also not be forgotten that, just as there are periods in which gold can underperform risk assets, there are also periods in which it can outperform, often noticeably.
Gold Price AUD ending June 2016
The last fifteen years have been a good example of this, with gold prices rising more than Australian and international equities over this time period, with a positive return differential of nearly 7% per annum compared to the latter.
Indeed, physical gold in Australian dollars has outperformed all liquid asset classes since the turn of the century, not just those listed in the table above, but also more traditional defensive assets such as cash and fixed income.
This outperformance has carried over into 2015 and the first half of 2016, with Australian dollar gold prices rising approximately 20% from the end of 2014 to the end of June 2016. That is a higher return than bonds and cash over this period, as well as the local stock market, which finished the first half of 2016 struggling near the 5,200 point levels, down well over 10% from its early 2015 highs.
Whilst this does not mean that gold will continue to outperform in the years ahead, it does show it can clearly hold its own as an investment asset from a return perspective, with the strong results it has generated over the short, medium and long-term helping justify its role as a core asset in a well-balanced portfolio.
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