Gold investors had a scare earlier this month when the price dropped sharply. But experts say it remains a safe haven asset and one that is likely to appreciate.
Over the last year, the gold price has seen growth of up to 15 per cent. But over the last couple of weeks it has dropped, leaving investors who expect gold to hold its value in times of crisis disappointed.
Gold, which is traded in US dollars, dropped to US$1450 an ounce last week, down over 12 per cent on its seven-year high of US$1703 on March 9. It currently sits at about US$1500 at the time of publishing which is roughly $200 higher than it was 12 months prior.
For the same period, the Australian dollar price was around $2577 on March 9 and dropped to $2368. It is now up to over $2650. The price has increased over 43 per cent from around A$1850 a year ago.
Australian investors with an unhedged exposure to the gold market have done much better as currency devaluation has helped keep the gold price high in Australian dollars.
Richard Hayes, chief executive of Perth Mint says: “The drop that we have seen is due to mass liquidations of cash. Cash is king right now and people are needing to liquidate their positions.”
The liquidations of cash are on both an institutional and retail investor basis. On the institutional level, it is to meet margin calls or positions. For retail investors, the selloff was likely to make up for losses in other asset classes.
Daniel Hynes, senior commodity strategist at ANZ says: “Gold had performed pretty well up to that point and we had a good gain locked in for the year. It was the recipient of the liquidity issue.”
Despite being an uncorrelated asset, the volatility in pricing is driven by fear and a lot of irrational sentiment as a result of the spread of COVID-19.
Investors can be reassured that the price drop was not based on the fundamentals that drive gold pricing but rather a financial issue, according to Hynes.
Hynes says: “Considering the volatility we’re seeing in other markets it’s held up pretty well. Even with the losses, we have seen it’s slightly up on year. Normally it is a stable investment but with a lot of other asset classes really underperforming it does still stand out as a sort of protector of wealth.”
The outlook for gold prices remains stronger than other assets and investor demand is growing as they feel safe knowing that gold cannot be manufactured, made or destroyed.
Kris Walesby, chief executive of ETF Securities has seen $220 million of inflows into its Physical Gold ETF, totalling over $1.5 billion of funds under management. There has been around $60 million in inflows since the market correction.
Walesby says: “I think that gold is technically deflated at the moment as gold’s true value right now is US$1700. It is also one of the only assets that is uncorrelated.”
In addition, ANZ expects gold to trade higher over next 12 months and forecasts it to rise to US$1750 with the high probability of it reaching US$2000 in the second half of the year, depending on the extent of the pandemic and its economic implications.
Hynes explains ANZ’s forecasting took into consideration the targets for US bond yields, the US dollar and inflation, it still points to a significant valuation.
Andrew Duncan, business development manager at ETF Securities agrees noting gold’s correlative connection to US 10-year treasury real yields has historically been negative.
Over the last 10 years, for every quarter point fall in real yields, there’s been a corresponding $75 to $80 positive price move for gold.
Hynes says: “In the shorter term if these really heavy falls on equity markets, there is still a risk that the search for liquidity will continue but over the next 12 months we are confident the gold price will trend higher.”
The physical demand for gold has increased too with coin dealers running short. Hynes says this highlights gold’s status as a predictor of wealth.
“I think once, once the extreme panic subsides then you will find that that typical safe haven status for gold will continue.”
For investors deciding to buy physical gold or invest in gold mines, Hayes says its dependant on what exposure the investor is looking for. Both provide exposure to the price of gold.
For investors looking for exposure to gold and purely gold, Hayes says there’s no finer way to do it than to buy gold directly either through an ETF or through a depository like Perth Mint or to buy physical bars and coins.
For investors looking for broader exposure to what gold can do, a gold mining stock may be suitable. But it comes with different risks.
Hayes says: “Investors also taking a market risk on the management of the mining company, and on the ability of that mining company to continue to generate cash flows, based on the gold that has been mined.
Even though gold does not produce returns, investors can find solace knowing that the drop-in gold price is still less than that of equity markets and its value is forecast to rise.
Hayes says: “If history is any guide of the future, what gold will continue the role that it has for many thousands of years, as being that asset of safe haven and refuge.”