Gold celebrated the 50th anniversary of its split from the US dollar in August. The Perth Mint explains why the precious metal remains indispensable today.
It has been half a century since United States President Richard Nixon cut the ropes between gold and the US dollar, following rising inflation and a decline in gold reserves.
In what was initially a temporary suspension, gold has remained a separate investment asset from the US dollar throughout this time.
Gold has ballooned from below $US40 ($54) per troy ounce to above $US1700 per troy ounce in the five decades since the split as it continues to be viewed as a safe-haven investment.
The Perth Mint is the third and only branch of Britain’s Royal Mint still in operation, being one of Western Australia’s largest exporters, shipping around $18 billion of gold and silver bullion, and collectable coins.
The Perth Mint has maintained a strong relationship with mining companies and consumers alike, overseeing the entire precious metal value chain.
“Today we refine the vast majority of Australia’s newly mined gold,” Perth Mint chief sustainability officer Stephanie Ward tells Australian Resources & Investment.
“As the needs of our mining customers have changed over time, so have we, and today we continue to provide the safest, lowest risk refining services available.
“Our world-class assay laboratory ensures that our customers receive the most accurate and timely outturn for their metal.”
Despite Australian gold output topping the global production rankings, the declining gold price tells a different story.
Investors scrambled to gold as a safe haven at the onset of the COVID-19 pandemic, causing the price to rocket into record territory of $US2067.15 per ounce in August 2020. It has since dropped to below $US1800 per ounce (at the time of writing).
Perth Mint manager listed products and investment research, Jordan Eliseo, says there are multiple factors contributing to the lower price, including a momentum exhaustion, inflation and the strength in equity markets.
“All markets just need time to work off excess either to the downside or upside. A correction in gold is not unexpected given how far it rallied in August 2020,” Eliseo says.
The United States Consumer Price Index rose from 1.31 per cent to 5.4 per cent between August 2020 and July 2021, yet gold has dropped significantly during this period.
Eliseo says the market believes the current inflation spike is transitory and will decline in the coming year, which is leading a retraction in the gold price.
This is due to the market’s belief that inflation will be transitory due to a reduction in commodity price recoveries, stimulus spending and supply chain bottlenecks.
“The idea is that there’s quite significant supply chain bottlenecks around the global economy right now, which makes sense because we had this huge shock where we had to put the global economy into a coma when COVID hit last year,” Eliseo says.
“It’s a lot easier to shut an economy down than to reopen it up. So, it’s natural there’d be the bottlenecks in supply chains as that opening occurs and that’s going to contribute to a short-term spike inflation.”
With many commodities returning to pre-COVID levels, the increase in price appears more pronounced due to last year’s low equity market prices.
Eliseo says this has made investors weary that the consumer price index will do the same.
“The gap between where inflation currently sits right now and what the markets expectation will be for inflation over next 10 years – it’s basically back to levels we saw in 2007 to 2008 just before the global financial crisis (GFC) hit,” he says.
“That’s a very interesting reading of where markets are broadly at and where gold is at as well.”
Since 1971, gold has returned about eight per cent per annum in US dollar terms – similar to most developed market currencies, which range between eight to 10 per cent per annum, making it a worthy investment compared with cash and bonds.
By continuing to deliver strong returns to investors, gold has been able to weather the storm of several global crises.
Eliseo says the NASDAC crash in 2000, the September 11 attack on the World Trade Centre, the 2008 GFC and the COVID-19 pandemic have all demonstrated the importance of gold as a safe-haven investment.
“During periods of crisis, gold does tend to see an uptick in buying and increase in demand,” Eliseo says.
“Gold is not just a crisis hedge … while it might not go up as much as the share market, it has delivered positive returns in more friendly equity market environments.”
The Perth Mint is listed on the ASX, which has allowed investors to access gold investment.
By making it easier for people to buy in to gold, this has ensured that the precious metal is both a popular and relevant form of investing.
Eliseo says gold has enjoyed a broadly positive period since the GFC, but it is not as bullish as it was in the immediate years following the crash.
“We’re in a fairly unconventional space right now. Rates being at or near zero for the better part of 10 or 12 years in large parts of the developed world,” he says. “All of that is supportive of the idea the sentiment to gold is more positive.
“The sentiment towards gold (now) is a bit more depressed and nowhere near as exuberant as 12 years ago when we began to see quantitative easing, zero interest rates for the first time, and equities were trading at a much lower price and suffered that enormous crash during the GFC.
“People were much more nervous about equity markets than they are today, which by definition on a relative basis means they were more positive to things like gold than perhaps they are today even though the macroenvironment is still very supportive.”
Cryptocurrency has emerged as a popular alternative method of investment in recent years. However, it has not shown whether it can offer the same safe-haven investment traits of gold.
Eliseo says that because cryptocurrencies are marketed as digital gold, it shows the fortitude and brand recognition of the precious metal.
“We’ve got 5000 years’ worth of history that demonstrates golds value and ultimate long-term safe-haven asset. The last 50 years just reinforce that,” Eliseo concludes.
This story also appears in the October issue of Australian Resources & Investment.