Amid reports of the "Death of Gold" we're investigating the recent dive in the price of this precious metal to understand the fundamentals of its demand and price drivers.
The textbook view is that gold performs best when real interest rates are low. When deciding whether to hold gold the main comparison is made against the returns from holding cash in a back account. When real rates are low inflation is stifling the interest paid on cash. This is the current situation in Australia and the result has been strong returns on gold.
A key criticism of gold is its lack of income generation, there's no interest or dividends. However, it can protect the real purchasing power of your investment among fluctuations in other markets.
But of course gold markets have turned bearish with the gold price slumping a staggering $US50 in a matter of minutes on Asian markets last week. The precious metal is currently hovering around the $US1,100/oz, a five year low, and the key reason is… the prospect of the US Federal Reserve raising rates.
Ever since the GFC forced US interest rates to be slashed the real return on cash has been low and gold has been attractive. With the prospect of a Fed hike gold has gone out of favour and there has been a rash of selling. Prices also weakened when the Chinese government released data on its gold holdings which showed lower stocks than had been anticipated. Demand is weak.
But gold has always a safe haven commodity; the sustained bull market of US equities will continue to depress gold prices along with rising rates.
Jordan Eliseo is Chief Economist at ABC Bullion, he understands the vagaries of the gold market better than most and while he concedes the gold price may still have lower to go, he is looking long term and suggests the recent rout is an opportunity to increase gold holdings at value, rather than the death of gold.
Jordan Eliseo: The pullback in precious metals we’ve seen since 2011 is reminiscent of the mid cycle correction in the last precious metal bull market. Rather than heralding the “death of gold”, as most analysts are predicting, we think the precious metal market is in the process of bottoming, with gold likely to head higher in the coming years. We expect local investors to get additional bang for their buck, as we also see the further downside in the AUD in the years ahead.
John Treadgold: There's much discussion about the prospects of including gold in an SMSF, is this a good option for retirees even though it doesn't generate income?
Jordan Eliseo: Absolutely. Apart from the strong long-term returns, physical gold provides many other benefits for a SMSF trustee looking to put together a robust investment portfolio. Firstly, it’s uncorrelated to the equity market, and tends to do best when the stock market is volatile. As such, it will help a trustee balance out the risk they have from their exposure to the ASX 200. It also acts as a natural currency hedge, something trustees should be looking for with the AUD likely to be under pressure in the years ahead. Thirdly, physical gold does best when real interest rates are low, something trustees are acutely aware of with the cash rate at record lows. Finally, it offers an opportunity for outsized gains, with potential returns of many times invested capital
John Treadgold: Buying physical gold from a trader is one option, but what are some financial products that offer more liquid exposure to gold?
Jordan Eliseo: You can get exposure to gold via the physical metal, via a gold ETF, via gold mining companies and via gold futures and CFDs. All have their merits, but when making a decision - an investor should weigh up the liquidity of each option, the security and redeemability of the position, and the costs. When you assess the various ways you can get exposure to precious metals against these criteria, physical metal wins hands down.
John Treadgold: And finally Jordan, what's your forecast for the gold price out to 2020?
Jordan Eliseo: I expect physical gold to be the best performing liquid asset class of the next few years. Prices may well exceed their previous all time high, with USD $2,500/oz not out of the question by 2020. If the AUD is trading between USD $0.60 and USD $0.70, that will be a gold price for local investors of $3,571 to $4166/oz, a fantastic return should it come to pass.
Mining production gains & falling prices
Newcrest Mining Limited (ASX:NCM)
has increased its production over the full 2015 financial year. Australia’s largest listed gold miner lifted gold output by 1 per cent to 2.4 million troy ounces in the 12 months to the end of June, coming in line with guidance. Copper production soared 12 per cent to 96,816 tonnes, also meeting the miner’s guidance range of between 95,000 and 105,000 tonnes.
Sandfire Resources NL (ASX:SFR)
and JV partner Talisman Mining Limited (ASX:TLMreported another positive exploration update. The results have been taken from the Springfield Project, about 10 kilometres east of Sandfire’s DeGrussa Copper Mine in Western Australia.
Whitehaven Coal Limited (ASX:WHC)
has delivered record June quarter and annual production for the year to the end of June. Quarterly output grew 66 per cent to a record 4.8 million tonnes while annual coal output rose 41 per cent to a record 14.6 million tonnes. The New South Wales focused coal producer also achieved a higher average price for all its export thermal coal sales than the benchmark.
Lynas Corporation Limited (ASX:LYC)
has achieved record cashflow and sales in the last quarter of the 2015 financial year. The rare earths producer reported positive free cashflow of $6.4 million in the June quarter while gross sales revenue came in at $51.9 million.
BHP Billiton Limited (ASX:BHP)
has boosted its iron ore output over the full 2015 financial year and forecast further production growth in the year ahead. The global mining giant improved iron ore output by 14 per cent to 233 million tonnes in FY15 and expects output to grow by 6 per cent this financial year.
Fortescue Metals Group Limited (ASX:FMG)
has improved its production and lowered costs over the 2015 financial year. The iron ore miner’s increased production by 10 per cent over the year to the end of June while costs fell 35 per cent.
-- John Treadgold