The price of gold is poised to reach an all-time high in Australian dollars thanks to a perfect financial storm being whipped up by a higher US dollar price for the metal, a falling Australian dollar, and the wildcard phenomenon of a global rush into negative interest rates.
The combination has pushed the local gold price back above $A1700 an ounce, seemingly on track to overtake the previous record of $A1804/oz reached in August, 2011.
The rise has rocket-powered Australian goldmining and exploration stocks with sector leaders such as Newcrest (NCM) up 88 per cent in past eight months, rising from $10.55 to last sales at $19.95, Evolution (EVN) up by 129 per cent from 89c to $2.04, and St Barbara (SBM), up more than 500 per cent from 38c to $2.37.
Whether such a strong upward move can continue is never a certainty in any form of investing, and the temptation for investors already exposed to gold to take some of their money off the table would be strong.
But so too is the evidence that gold has further to go thanks to that trifecta of factors influencing the price; the US dollar price, the falling Australian dollar, and negative interest rates.
An example of how each factor is working can be seen in the way gold behaves as a commodity and a currency at the same time.
The previous record Australian gold price was reached when the US dollar gold price was also at an all-time high of $US1895/oz at the afternoon fix on the London bullion market on September 6, 2011. On that day the Australian dollar exchange rate was $US1.05, producing a local gold price of $A1804/oz.
Spot gold price $AUD:
Today, the US dollar gold price is down 33 per cent to $US1267/oz, but the Australian dollar is down 30 per cent, quoted this morning at US73.69c to produce a local gold price of $A1719/oz.
Movements in the US dollar gold price and the Australian dollar are well known to most investors in gold and goldmining stocks.
What’s new in this perpetually-moving, two-part equation, is the addition of a third moving part; ultra-low and even negative interest rates which have spread around the world, including Australia which last week saw the Reserve Bank cut its official interest rates to a record low of 1.75 per cent, with another cut tipped for August.
The effect of ultra-low interest rates, and the drop into negative territory, is to turn one of gold’s biggest negatives into a positive.
In its bullion form gold does not generate any income, a criticism often levelled by investment analysts who argue that holding gold is a cost – but that same accusation can now be levelled at cash, which has also become a cost in much of Europe and parts of Asia.
A strong US dollar is also a threat to gold but that’s not the case today as the US economy struggles to continue its recovery and political uncertainty grows ahead of the November presidential election.
The Australian dollar is weakening rapidly as local interest rates slide and weak terms of trade weigh on the currency in the wake of the resources boom.
It’s the triple-headed combination of influences which underpins the theory that gold in Australia is on track to reach a record high, but for a glimpse of how that might happen it’s worth a look at the long-term effect of negative interest rates.
In Denmark, a country which has been experiencing negative rates for the past four years, the longest of any advanced economy, gold has become more appealing to savers.
Two weeks ago an economist with Saxo Bank, one of the biggest in Denmark, tipped a rise in the gold price to $US1500/oz in the next six-to-18 months.
Kay van-Petersen told the press that with yield becoming harder to earn on any form of investment, the focus was switching to capital preservation.
“There is no holy grail but from a macro perspective I think you have to look at precious metals,” he said.
“It’s very old school, but there is no paper currency that has ever lasted more than 200 years, if my memory serves correctly. Gold, after thousands of years, is still going strong.”
Another Danish economist, Kasper Ullegaard from Sampension in Copenhagen, pointed out in an interview with the Bloomberg news service that negative rates had become counter- productive.
“The policy makes people save more to protect future purchasing power and even opt for less risky assets because there is so little transparency on future return and risk,” Ullegaard said.
Gold has long been considered one of the best ways of preserving capital in troubled times and if capital preservation becomes a bigger factor in investment decision making as interest rates slip lower, then it becomes an even more attractive option.
Whatever the outcome in this three-part equation of currency values (US and Australian) and interest rates, the outlook for the local gold price is positive, especially if the local dollar continues to decline.
Tipping currency values is as tricky as tipping the gold price, but if a forecast earlier this week from Mark Walton, an economist with the French bank BNP Paribas, is correct then the Australian dollar might drop as low as US67c later this year.
If that happens then even at today’s gold price of $US1267/oz, the Australian price rises to a record $A1891/oz, and if the Danish forecast of gold at $US1500/oz proves to be correct then the local gold price at US67c rushes up to $A2238/oz.
Fun as it is to play calculator games with exchange rates, the key point is that the gold price and the exchange rate have now been joined by an interest rate factor and all three are looking positive for the Australian gold price and goldmining companies.