Download Precious Metals Bulletin

Tynan Partners
July 2015
Precious Metals Bulletin
Good as Gold - Is there a place for
precious metals in investment
portfolios. If so, what choices are
available?
Gold is the best known and most widely
traded precious metal. It has been a
store of wealth for over 5,000 years. Why
consider gold as part of an investment
portfolio? How can it be practically
included in an investment portfolio?
st
Is Gold relevant in the 21 Century?
Throughout history, gold has played an important role in ensuring the stability of financial systems, both as a form of currency and
as a store of value. In the past decade, gold has shown that it is both an effective risk management tool and source of capital
preservation. According to the US Geological Survey, Australia has the world’s largest known gold reserves and is the third largest
producer. Gold also ranks as Australia’s sixth largest export. Paradoxically, Australia has a low level of gold ownership relative to
many other countries.
Gold’s role in reducing portfolio volatility
Research by the World Gold Council and other bodies has shown that gold has a low or
negative correlation with other assets. Its inclusion in a portfolio reduces overall volatility.
Gold also acts as a store of wealth in periods of currency devaluation and economic instability.
Including gold in portfolios with a weighting of 3.3% to 7.5% (depending on risk appetite)
demonstrably reduces volatility and enhances long term returns. Chart 1 below, illustrates the
benefit of holding gold in portfolios particularly during periods of above average volatility.
Diversification in a low interest rate environment
The post GFC era has been characterised by rising public debt and historically low long term interest
rates. In many countries the yield on sovereign bonds is negative in absolute and/or inflation adjusted
terms which is unprecedented in the several centuries of modern investment markets.
Australia has the
world’s largest
known reserves of
gold. Gold is our 6th
largest export.
Paradoxically,
Australia has a low
level of gold
ownership relative
to many other
countries.
It seems unlikely that investors will obtain the same level of returns from bonds (defensive assets) as they have over the past two
decades, or that they should rely solely on them to meet liabilities and reach long-term savings goals. Chart 2 below, shows that
optimal allocations for gold increase when an expected bonds return are lowered.
Chart 1: Comparative returns on assets during periods of
global volatility
Source: Thomson Reuters, World Gold Council
Chart 2: A reduction in expected bond returns
significantly increases optimal weighting that gold
should have in portfolios
Source: Thomson Reuters, World Gold Council
Morgans Tynan Partners
Level 1 2 Edward Street Brisbane QLD 4000 | GPO Box 601 Brisbane QLD 4001 Australia
Telephone +61 7 3152 0600 Facsimile +61 7 3152 0650 www.morgans.com.au/tynanpartners
ABN 49 010 669 726 AFSL 235410 A Participant of ASX Group A Professional Partner of the Financial Planning Association of Australia
Morgans and CIMB – Please visit www.morgans.com.au to understand the products and services within our alliance
Investing in Gold – what are the options?
Most analysis on the role of gold in portfolio diversification focuses on gold as a metal i.e. bullion. This is the preferred investment
medium particularly in the Northern Hemisphere and Asia where gold has long been part of the investment landscape. Australian
investors however, have tended to gain their exposure to gold indirectly, through gold equities and gold ETFs, principally because
of liquidity and storage issues of holding physical metal.
Below is a table summarising the various investment options available to investors seeking an exposure to gold. There are now
many more options available to investors to cater to differing needs/preferences.
Method
Description
ASX-listed
Gold Stocks
Most common form of exposure to gold. For many investors, exposure to ASX-listed companies with
their primary income from gold (and other metal) production are a convenient and liquid way of gaining
exposure to precious metals. Many ASX listed gold stocks have operations in Australia and so have
low currency and country risks and some pay dividends. However, as with any equities there is
generally increased volatility which is sometimes not related to the price of the underlying commodity.
Exchange traded
Funds (ETFs)
ETFs are financial products listed on a stock exchange and the majority are backed with allocated
bullion. They are purchased and sold in the same way as shares. ETFs offer a low cost and
transparent way to gain exposure to precious metals and precious metal equities. Gold equity ETFs
have no active stock selection so mirror the underlying index returns. There are a number ETFs both
locally and abroad which provide exposure to the underlying commodity (metal) including gold, silver
and platinum without the need for storage or insurance and ETFs provide liquidity.
Unlisted Managed
Funds
There are relatively few managed specialist precious metals managed funds. These tend to be focused
on the Northern Hemisphere and may not appeal to many Australian investors.*
Listed Investment
Companies (LICs)
Like unlisted managed funds, these investments which are listed on the ASX offer greater transparency
and easier administration. Unfortunately, there is not a large selection of available funds from which to
select, however they provide investors with the ability to invest in a diverse range of typically smaller
producer/explorers.
Gold Accounts
For investors who prefer to have exposure to the ‘real thing’ without the hassle of safe custody.
Examples include Allocated Gold Accounts, Unallocated Gold Accounts and gold savings plans. These
can provide an effective and efficient alternative to buying and holding physical metal. Gold Bullion
stored and managed by a bullion dealer or a depository.
Bullion, Coins and
Collectables
For investors who prefer to have exposure to the ‘real thing’. Purchasing gold coins and bars either to
store personally, or to be held securely on one’s behalf by a bank or other financial intermediary such
as a bullion dealer.
* The appreciation of the $US (and corresponding devaluation of the $AU) together with a reduction in the cost of fuel and labour
have significantly enhanced the performance of Australian gold mining companies, as many are making cash profits of
approximately AU$400 oz. This has seen a consolidation in the listed gold sector in recent months contrary to the experience of
producers in the Northern hemisphere most of whom are operating at losses.
We see merit in having some exposure to gold in diversified portfolios. This can be achieved in a number of
ways either directly or indirectly to suit investors’ liquidity requirements and tolerance for risk.
If you would like to learn more about how to further diversify your portfolio
further by including an exposure to precious metals, please feel free to
contact your adviser at Morgans Tynan Partners on (07) 3152 0600 or
1300 328 856.
DISCLAIMER
This report was prepared by Andrew Fleming (Authorised Representative: 466078) through independent research facilities as a private communication to clients and was not intended
for public circulation, publication or for the use of any third party, without the prior written approval of Andrew Fleming. It does not constitute advice to any person. The views
expressed here are those of the author and do not necessarily reflect those of Morgans Limited (ABN 49 010 669 726), its related bodies corporate, directors and officers, employees,
authorised representatives and agents (“Morgans”). Morgans may publish research on the company/s named here, which will be forwarded on request. While this report is based on
information from sources which Andrew Fleming considers reliable, its accuracy and completeness cannot be guaranteed. Any opinions expressed reflect Andrew Fleming’s
judgement at this date and are subject to change.
Morgans does not accept any liability for the results of any actions taken or not taken on the basis of information in this report, or for any negligent misstatements, errors or omissions.
This report is made without consideration of any specific client’s investment objectives, financial situation or needs. It is recommended that any persons who wish to act upon this
report consult with their investment adviser before doing so. This report does not constitute an offer, or invitation to purchase, any securities and should not be relied upon in
connection with any contract or commitment whatsoever.
DISCLOSURE OF INTEREST
Andrew Fleming and Morgans advise that they and persons associated with them may have an interest in the above securities and that they may earn brokerage, commissions, fees
and other benefits and advantages, whether pecuniary or not and whether direct or indirect, in connection with the making of a recommendation or a dealing by a client in these
securities, and which may reasonably be expected to be capable of having an influence in the making of any recommendation, and that some or all of the Authorised Representatives
may be remunerated wholly or partly by way of commission.