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

The nuts and bolts of family trusts

There are well over 800,000 family trusts in Australia, controlling more than $3 trillion of assets. Here's a guide on whether a family trust may have a place in your individual investment strategy.

Welcome to Firstlinks Edition 581 with weekend update

A recent industry event made me realise that a 30 year old investing trend could still have serious legs. Could it eventually pose a threat to two of Australia's biggest companies?

  • 10 October 2024

Welcome to Firstlinks Edition 583 with weekend update

Investing guru Howard Marks says he had two epiphanies while visiting Australia recently: the two major asset classes aren’t what you think they are, and one key decision matters above all else when building portfolios.

  • 24 October 2024

Warren Buffett is preparing for a bear market. Should you?

Berkshire Hathaway’s third quarter earnings update reveals Buffett is selling stocks and building record cash reserves. Here’s a look at his track record in calling market tops and whether you should follow his lead and dial down risk.

Preserving wealth through generations is hard

How have so many wealthy families through history managed to squander their fortunes? This looks at the lessons from these families and offers several solutions to making and keeping money over the long-term.

A big win for bank customers against scammers

A recent ruling from The Australian Financial Complaints Authority may herald a new era for financial scams. For the first time, a bank is being forced to reimburse a customer for the amount they were scammed.

Latest Updates

Property

Coalition's super for housing plan is better than it looks

Housing affordability is shaping up as a major topic as we head toward the next federal election. The Coalition's proposal to allow home buyers to dip into their superannuation has merit, though misses one key feature.

Planning

Avoiding wealth transfer pitfalls

Australia is in the early throes of an intergenerational wealth transfer worth an estimated $3.5 trillion. Here's a case study highlighting some of the challenges with transferring wealth between generations.

Retirement

More people want to delay retirement and continue working

A new survey suggests that most people aged 50 or over don't intend to stop work completely when they reach retirement age. And a significant proportion of those who delay retirement do so for non-financial reasons.

Economy

US debt, the weak AUD and the role of super funds

The more the US needs capital and funding, the higher its currency goes. For Australia, this has become a significant problem as the US draws our capital to sustain its growth, putting pressure on our economy and the Aussie dollar.

Investment strategies

America eats the world

As the S&P 500 rips to new highs, the US now accounts for a staggering two-thirds of the world equity index. This looks at how America came to dwarf other markets, and what could change to slow or halt its momentum.

Gold

What's next for gold?

Despite a recent pullback, gold has been one of the best performing assets this year. What are the key factors behind the rise and what's needed for the bull market in the yellow metal to continue?

Taxation

Consulting on the side? Don't fall into these tax traps

Consultants must be aware of the risks of Personal Service Income rules applying to their income. Especially if they want to split their income or work through a company.

Sponsors

Alliances

© 2024 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.