Why, how, now: SMSF trustees are turning to gold

Apr 10, 2019

About the Author

Jordan Eliseo Headshot

Jordan Eliseo, Manager Listed Products and Investment Research

At this week’s SMSF Association investor event in Sydney, Perth Mint Senior Investment Manager Jordan Eliseo discussed the why, the how and the now of SMSF investing in physical precious metals. We share his insights below.

Why buy gold?

There are typically five key reasons SMSF trustees invest in physical gold (and silver).

The first of those is that, like the share market, gold has delivered quite strong returns over the long run. Some years are obviously better than others, with gold’s best ever annual return coming in at more than 100% back in 1979. It has its bad years, too, with the worst ever calendar year return recorded in 1981 when gold fell by almost 30% in just 12 months.

Putting the best and worst years to one side, and looking at the long run return, we can see that from the 1970s to the end of 2018, gold appreciated in value by more than 8.5% per annum.

Of particular interest to SMSF trustees is gold’s historical ability to perform strongly both when equity markets fall and/or when the “real” cash rates (which factor in inflation) are low. An asset that has these qualities can be of benefit to portfolios, particularly those with large holdings in listed equities, and cash or term deposits, which many SMSF trustees hold.

To help illustrate these points, while gold tends to underperform shares during years when the share market goes up, in years when the stock market falls in value, the average return of gold is +15%, benefitting any investor with bullion in their portfolio.

You can see this in the chart below.

As a potential alternative to cash, gold has historically come into its own when real rates are 2% or lower as investors move their money out of bank accounts and term deposits due to the low returns, and instead invest in other assets, of which gold is one.

To that end, over the past four and a half decades plus, in years when the real cash rate has been 2% or higher, gold has averaged a return of only 4%, with its best and worst years coming in at +29% and -29% respectively.

But during years when the real cash rate has been below 2%, despite having the odd year of poor performance, including one when it fell 21%, the average return from gold has been more than 20%. Gold has also historically outperformed shares and bonds in these years.

This analysis of gold in various real cash rate environments is based on a detailed study from The Perth Mint completed using Reuters data, with a soon to be released SMSF whitepaper delving into these issues in more detail.

Finally, gold is simple to buy and store, making it easy to incorporate into a portfolio, and acts as a hedge against the falling dollar.

All these factors are making the precious metal increasingly appealing to SMSF investors.

How to buy gold for your SMSF

Depository solutions

Due to their ongoing reporting obligations, it is considered best practice for SMSF trustees who are investing in gold to use a depository solution. This option provides a bullion broker to trade metal as well as provide storage, insurance and ongoing reporting (EOFY valuations) to assist the SMSF trustee meet their reporting obligations.

The Perth Mint is uniquely suited in terms of the investment solutions it offers SMSF trustees.

Our depository solutions offer a combination of phone trading and support, 24/7 online trading access, competitive fees, fully insured storage and all the transactional and valuation data a SMSF trustee requires.

ASX-listed product

Our ASX-listed product (ticker code PMGOLD) is another simple option for SMSF trustees to use.

Backed by physical bullion, PMGOLD is easy to trade as each unit represents 1/100th of an ounce of gold.

Therefore, if the gold price in Australian dollars is $1,800 per oz, you’d expect PMGOLD to be trading at $18 per share. PMGOLD is also competitively priced, with a management fee of just 0.15%, making it a cost effective way to buy and hold bullion in your SMSF.

Unique government guarantee

As the only government guaranteed gold depository in the world, all holdings are guaranteed by our sole owner, the Government of Western Australia, under the Gold Corporation Act 1987.

Secure vaulting

All precious metal held on investors’ behalf is safeguarded in our central bank grade vaults, the largest such network in the southern hemisphere.

What the current economic climate can mean for gold

It’s no surprise that gold demand in the US and Europe soared in the aftermath of the Global Financial Crisis (GFC).

While quantitative easing and fears (so far largely unrealised) of higher inflation were part of that demand, the other arguably more powerful factor was the reduction of real cash rates towards or below zero.

As discussed above, investors naturally looked for alternatives in an environment where their bank deposits were earning nothing - and gold was a beneficiary. This trend is still in place in the northern hemisphere, and is now also taking shape in Australia too, with an already record low cash rate of just 1.50% likely to be cut in the months ahead. Indeed if current market pricing turns out to be accurate, it’s looking like the cash rate will be just 1% by mid to late 2020.

Any increases in the cash rate, should they eventuate, are likely to be incredibly gradual, with 10-15 year bond yields currently suggesting we’ll be in a low cash rate environment for years to come. Australian savers, including SMSF trustees, will continue to look for cash “alternatives” in this market, and we expect gold demand will benefit as a result. 

Coupled with historically expensive financial assets, the desire to move a portion of one’s portfolio into alternative, safe haven investments will continue to grow.

Past performance does not guarantee future results. The information in this brochure and the links provided are for general information only and should not be taken as constituting professional advice from The Perth Mint. The Perth Mint is not a financial adviser. You should consider seeking independent financial advice to check how the information in this brochure relates to your unique circumstances. The Perth Mint is not liable for any loss caused, whether due to negligence or otherwise, arising from the use of, or reliance on, the information provided directly or indirectly, by use of this page.