Flushing out gold investors

Summary: Gold hasn't exactly shot the lights out on a year-to-year basis, but over the shorter term its performance has been solid. Put that down to a combination of global unrest and steady investment demand for bullion.

Key take-out: The World Gold Council expects an increase in gold demand during the second half of 2017, which will benefit Australian gold miners. In addition, Chinese investors have created a strong market for Australian gold, with sales of bullion from the Perth Mint rising to more than 230 tonnes.

North Korea's firing of another ballistic missile over Japan on Friday morning caused plenty of consternation, but it wasn't enough to put a rocket under the gold price.

After soaring briefly, putting on just over $US8 an ounce, the gold price quickly came back to Earth with a thud – ending the week at $US1,320, around $US6 lower than where it had started. In fact, the biggest movement in gold last week had nothing to do with the actual price of the precious metal at all.

It came with the uncoupling on Friday of a 1,600 ounce, solid gold, toilet from the fifth-floor restroom of New York's famous Solomon R. Guggenheim Museum – a $2.65 million 18-carat sculpture by Italian artist Maurizio Cattelan simply titled America.

As a museum crowd puller, the gold exhibit was a huge success. More than 100,000 people are said to have patiently lined up to “interact” with the fully functioning loo over its 12 months on display. But the bottom line was far less impressive.

Gold closed on Friday barely ahead of where it was 12 months earlier. So, based on its weight, and gold's flat performance, the toilet's face value rose by less than $US15,000 over the full year – a paltry annual return of just 0.70 per cent.

Yet, despite gold's mediocre September-to-September performance, there is a story in the price gyrations that have been occurring in between.

After trending down over the latter part of 2016 to a low point just above $US1,100 an ounce in late December, gold has been on the up, for the most part. It has gained around 9 per cent since the start of July, and almost 16 per cent since early January, well surpassing equity market returns.

Some gold analysts are forecasting gold will continue to find good support above $US1,300 an ounce, and may float back towards $US1,400 by year-end. Of course, that's still a long way off the all-time peak for gold of more than $US1,900 an ounce reached in September 2011.

There were different factors back then. During the height of the Global Financial Crisis, gold came into its own as a safe haven currency. Central banks, fearful of a debasement in their own paper currencies, went on a gold buying spree – filling their vaults with tonnes of bullion.

As government demand increased for physical gold as a monetary hedge, so did demand from hedge funds, professional gold traders, and individual investors for bullion and tradeable securities linked to gold, including shares in listed gold companies and gold exchange-traded funds.

Among them was US billionaire hedge fund investor John Paulson. He's been a long-time gold bull, and US Nasdaq exchange data shows his company Paulson & Co. remains one of the largest holders in the world's biggest gold fund, the US-listed SPDR Gold ETF, with a holding worth $US558 million.

Heightened volatility, around the threats of war, terrorism, geopolitical tensions, and a host of economic anxieties, should continue to play into Paulson's hands and those of other avid gold investors.

Behind gold's rise since January are a series of events worrying investors. Chief among them is US President Donald Trump, with concerns over his leadership and his government's ability to pass key economic reforms continuing to weigh on business and investor sentiment.

Last week the price of gold finally broke back through $US1,340 an ounce (albeit briefly), largely thanks to Kim Jong-un's latest weapons antics and the devastating impact of Hurricane Irma through the Caribbean and parts of the United States. To take shelter from both storms, many investors fled back to the relative stability of gold as a store of value in times of turmoil.

Yet, the big question for investors, is whether gold demand will hold. The latest data from the World Gold Council, released in early August, showed a slow-off in gold purchases over the second quarter of 2017 as inflows into gold-backed ETFs declined. While still positive, gold ETF investor inflows fell from 112 tonnes in the first quarter to 56 tonnes at June 30.

Net central bank purchases of 177 tonnes in the first half of 2017 were down 3 per cent compared to the same period in 2016, although gold bar and coin investments rose, as did purchases for both jewellery and technology.

But the WGC said while first-half gold demand was lower, the market is just rebalancing from the extraordinary inflows in 2016, particularly into gold ETFs. It expects to see another pick-up in gold demand, and that will benefit Australian companies mining the metal.

The Perth Mint notes that Chinese investors demand via the Shanghai Gold Exchange has created a strong new market for Australian gold producers, with sales of Australian bullion rising to more than 230 tonnes, worth $11 billion. The majority of exports are in the form of 1 kilogram gold bullion bars, which are certified at 99.99 per cent purity.

Australian gold exports into China have more than doubled from 110 tonnes in 2011 to 232 tonnes in the past year. Over the past 12 months alone, growth has been more than 8 per cent.

“In 2014, the Perth Mint became the first foreign refinery accredited on the Shanghai Gold Exchange and we have worked steadily to establish this new market,” says chief operating officer David Woodford. “Today we are on track to achieve our goal of becoming the biggest source of imported gold in the Chinese market and that is great news for Australian gold producers and Australian mine workers.”

Nevertheless, a research report released last week from London-based ETF Securities noted that gold miners are “a poor proxy for gold allocations because they depend on industry competition and company specific factors beyond the gold price”.

“While gold miners are valid investments, they are an investment in equity not gold and shouldn't be viewed as a perfect substitute.”

In essence, investors should separate gold stocks from physical gold allocations within portfolios in order to potentially benefit from gold's unique investment and risk management characteristics.