Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 173

Gold can play a role in SMSF portfolios

Physical gold has been one of the best-performing assets this year, rising 20% and currently sitting at about $1,750 per troy ounce. This continues a strong run dating back to the turn of the century, with the precious metal appreciating close to 9% per annum over this period.

Yet despite these solid returns, gold is still barely on the radar of most investors: less than 0.5% of total global pension fund assets are held in gold. In Australia, demand from SMSF trustees is rising, though it’s coming off a very low base. According to ATO data and recent asset allocation statistics from SuperConcepts, less than 1% of SMSF funds hold ‘other’ assets, of which physical gold is a small component.

With prices near their highs, some investors feel they’ve missed the opportunity to profit from this cycle, though banks like UBS are upgrading price forecasts and JP Morgan stated that gold had entered ‘a new bull market’ earlier this year. No one can be sure how long it will last, though the average bull market lasts for just over five years, recording gains of 385%, according to the World Gold Council.

Trading and storage

Physical gold can be bought and sold 24 hours a day, with trading premiums of less than 1% of the value of the metal, depending on which products, volumes, and bullion dealers you choose.

For SMSF trustees, it is best practice to stick to investment grade cast bars, rather than coins and tablets, which come with higher trading costs.

Gold can be stored in three different ways:

  • Pool allocated metal: investors buy a claim on a pool of physical gold managed by a bullion dealer on behalf of all investors. There are no storage costs associated with this method.
  • Secure storage: investors buy an actual physical bar (or bars) that they own. Annual costs for this range from 0.75% to 1% of the metal’s value.
  • Private vaulting: physical bars are stored in the investor’s own vault. This can be done for as little as $252 per year, which works out at just 0.25% on a $100,000 investment.

Volatility and income

Price volatility and lack of income are legitimate concerns that any gold investor must be comfortable with. The volatility of annual returns for Australian dollar gold over the past 15 years has been around 12%, higher than that of traditional defensive assets like bonds, though lower than the volatility that equity market investors have endured over the same time period.

While it is true that gold will never provide income, traditional investments like term deposits also provide little income at the moment, and frustration with record low interest rates is forcing investors to look at alternative assets.

There are no guarantees, but if history is any guide, gold is one of those alternatives where prices tend to rise fastest in low ‘real’ interest rate environments, like the one we are in today.

The ‘real’ rate of interest is calculated by subtracting the inflation rate from the official overnight cash rate set by the RBA, and is currently sitting at just 0.5% in Australia (1.5% RBA rate minus a 1% CPI rate as at the end of June 2016). Since 1971 (when gold prices became free floating), the yellow metal has recorded average annual price gains in excess of 20% in years when the ‘real’ rate of interest was below 2%, outperforming both stocks and bonds in the process.

Hedge against equities

Gold historically performs strongly whenever the ASX is falling. In our book, Gold for Australian Investors, we analysed market returns for a variety of asset classes over a more than 40-year period, again starting in 1971. That study (inspired by a Q3 2015 research piece from AQR Capital Management, titled Good Strategies for Tough Times) found that physical gold was the best performing liquid asset in the 10 worst performing quarters for global equity markets.

This is captured in the chart below, which highlights the average performance for gold, as well as the average performance of Australian stocks, bonds and cash in those calendar quarters where global equity markets fell most.

Australian market returns when global equities fall most (calendar quarters since 1971)

Source: Gold for Australian Investors, Global Financial Data.

Obviously no one wants their shares to fall, but it does makes sense to have insurance against it happening, especially in an uncertain economic environment. Whether gold is still the highest-performing ‘risk off’ asset in years to come remains to be seen.

Central banks and emerging markets

SMSF trustees should be aware that the gold story is not all about rising demand from Western investors seeking a hedge against equities, or a cash alternative due to low interest rates. Gold prices will also benefit if consumers in emerging markets continue buying, with demand from these regions highly correlated to rising disposable incomes.

Central banks are now buying more than 500 tonnes a year, yet developing market central banks still hold less than 5% of their foreign exchange reserves in gold, versus a nearly 20% average for their advanced market counterparts.

No one can be sure what central banks will do next, but with over US$13 trillion in negative yielding sovereign debt, gold could become more attractive to emerging market central banks. Ken Rogoff, ex Chief Economist for the International Monetary Fund, stated in May this year that emerging market nations should increase their pace of gold accumulation, as the metal is both ‘highly liquid’ and ‘low risk’, both key criteria for reserve asset managers.

 

Jordan Eliseo is Chief Economist at ABC Bullion. This article is general information and does not consider the circumstances of any individual. Editor's note: This article focusses on physical gold, but gold Exchange Traded Funds are also available.

 


 

Leave a Comment:

RELATED ARTICLES

6 questions SMSF trustees are asking about gold

Inflation: A rare SMSF consideration

The asymmetric value of gold for Australian investors

banner

Most viewed in recent weeks

Finding the best income-yielding assets

With fixed term deposit rates declining and bank hybrids being phased out, what are the best options for investors seeking income? This goes through the choices, and the opportunities and risks involved.

What history reveals about market corrections and crashes

The S&P 500's recent correction raises concerns about a bear market. History shows corrections are driven by high rates, unemployment, or global shocks, and that there's reason for optimism for nervous investors today. 

Howard Marks: the investing game has changed

The famed investor says the rapid switch from globalisation to trade wars is the biggest upheaval in the investing environment since World War Two. And a new world requires a different investment approach.

Welcome to Firstlinks Edition 605 with weekend update

Trump's tariffs and China's retaliatory strike have sent the Nasdaq into a bear market with the S&P 500 not far behind. What are the implications for the economy and markets, and what should investors do now? 

  • 3 April 2025

Designing a life, with money to spare

Are you living your life by default or by design? It strikes me that many people are doing the former and living according to others’ expectations of them, leading to poor choices including with their finances.

World's largest asset manager wants to revolutionise your portfolio

Larry Fink is one of the smartest people in the finance industry. In his latest shareholder letter, the Blackrock CEO outlines his quest to become the biggest player in private assets and upend investor portfolios.

Latest Updates

Investment strategies

An enlightened dividend path

While many chase high yields, true investment power lies in companies that steadily grow dividends. This strategy, rooted in patience and discipline, quietly compounds wealth and anchors investors through market turbulence.

Investment strategies

Don't let Trump derail your wealth creation plans

If you want to build wealth over the long-term, trying to guess the stock market's next move is generally a bad idea. In a month where this might be more tempting than ever, here is what you should focus on instead.

Economics

Pros and cons of Labor's home batteries scheme

Labor has announced a $2.3 billion Cheaper Home Batteries Program, aimed at slashing the cost of home batteries. The goal is to turbocharge battery uptake, though practical difficulties may prevent that happening.

Investment strategies

Will China's EV boom end in tears?

China's EV dominance is reshaping global auto markets - but with soaring tariffs, overcapacity, and rising scrutiny, the industry’s meteoric rise may face a turbulent road ahead. Can China maintain its lead - or will it stall?

Investment strategies

REITs: a haven in a Trumpian world?

Equity markets have been lashed by Trump's tariff policies, yet REITs have outperformed. Not only are they largely unaffected by tariffs, but they offer a unique combination of growth, sound fundamentals, and value.

Shares

Why Europe is back on the global investor map

European equities are surging ahead of the U.S this year, driven by strong earnings, undervaluation, and fiscal stimulus. With quality founder-led firms and a strengthening Euro, Europe may be the next global investment hotspot.

Chalmers' disingenuous budget claims

The Treasurer often touts a $207 billion improvement in Australia's financial position. A deeper look at the numbers reveals something less impressive, caused far more by commodity price surprises than policy.

Fixed interest

Duration: Friend or foe in a defensive allocation?

Duration is back. After years in the doghouse, shifting markets and higher yields are restoring its role as a reliable diversifier and income source - offering defensive strength in today’s uncertain environment.

Sponsors

Alliances

© 2025 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.