The Deloitte WA Index’s gold report is a tale of two decades, covering gold’s transition from Y2K to the COVID-19 pandemic and everything in between.
The WA Index features gold heavily in the Top 10 companies by industry sector, including Gold Industry Group members Northern Star Resources, Saracen Mineral Holdings, IGO and Regis Resources. WA Energy & Resources participants taking a lead in this area is critical to the success of the industry generally, and highly influential in the outcomes of the WA Index against other indices.
Deloitte WA Audit and Assurance partner Dave Andrews said with four producers in the Top 10, and 10 gold-focused companies occupying the Top 20, the importance of gold to the WA Index cannot be ignored.
“It’s a well-known fact gold is considered a safe-haven asset in times of economic uncertainty, and with Brexit, the US/China trade wars, and a global COVID-19 pandemic, we are not surprised to have seen investors flock to add gold exposure to portfolios over recent years,” Mr Andrews said.
Deloitte’s analysis of commodity price movements over the past 12 months highlights gold as being one of only a few commodities able to close this year higher than it started. Deloitte also acknowledge the top movers by market capitalisation during the year, which includes Ramelius Resources in the Top 20.
Gold – the precious metal which often takes on different characteristics at different times of an economic cycle has been the backbone for many global monetary systems, including the US Gold Standard until 1971.
Although modern economies have progressed over time, due to its scarcity around the globe, gold has maintained its status as a highly sought-after commodity and remains a liquid asset class the worth of which challenges ‘cold hard cash’ in times of economic disruption and uncertainty.
Unlike other commodities such as oil, grain, or iron ore, once gold has been mined it is not consumed, per se, and as such nearly every ounce of gold ever mined is still within human possession.
Supply/demand forces that drive most commodities markets are not replicated within the gold market – there is no such thing as a glut or oversupply of the precious metal. In modern times, gold is seen as a safe-haven investment and reliable store of wealth, as such its value moves inversely to the general market. When the economy is thriving and traditional currency is appreciating, gold is less valuable, however in poor economic conditions or those of uncertainty, investors flock to the safety that a gold investment provides.
The latest edition of Deloitte’s WA Index reviews the rise of gold across the last 20 years and the broader economic factors that have facilitated the highs and lows of the gold price.
2000’s – The turn of the century
Gold prices historically maintained an inverse relationship to the value of the Greenback (USD). That is, as the USD appreciates, gold in ‘real terms’ becomes relatively more expensive to investors and naturally leads to a fall in demand for gold stores and subsequently the price of gold.
Similarly, as the USD depreciates, gold becomes cheaper for foreign investors and demand flourishes. Over the early 2000s the USD depreciated 25% from an USD index value of 112 in June 2001 to 84 in May 2008. The collapse of the USD was driven by soaring budgetary deficits and high inflation rates, and the rapid depreciation drove the gold price from USD $275/oz in 2000 to USD $970/oz in 2008.
The growth of gold was further compounded by the rapid emergence of Asian and Middle Eastern economies in the 2000s. This growth led to stockpiling of gold by these emerging central banks as well as an influx of wealth, consumers and purchasing power from a growing ‘middle class’ population. Naturally, with a spike in demand for a scarce resource, this led to inflationary pressures on the value of gold.
Whilst historically gold was purchased as a physical asset, new and existing investors were buoyed by the creation of two new Exchange Traded Funds (ETF). These ETF’s provided investors around the world with access and exposure to the gold market without physically purchasing and holding the commodity. ETF’s since facilitated an increase in transactions and turnover of the commodity and the ability for large funds to bring gold into diversified portfolios.
2008 – Global Financial Crisis
With gold the ‘go to’ safe-haven investment, we expect the value of gold to spike in times of serious economic, financial and geopolitical risks, and uncertainty.
However, at the peak of the Global Financial Crisis (GFC) in 2008, the gold price fell sharply from USD $995/oz in March 2008 to USD $715/oz in November 2008. The primary reason for the sharp decrease in the price at this time was the knee-jerk reaction from financial institutions to the severe liquidity problems they faced.
Banks required immediate dollar liquidity, yet a large majority of assets were held in long term investments such as bonds and housing mortgages that could not be quickly cashed. The immediate solution was to ‘borrow gold’ and sell it on the market to obtain liquidity. Whilst this short-term approach kept many banks afloat, the fire sale flooded the market and resulted in an unusual oversupply of gold globally which led to a spot price plummet of over 20%. It was not until mid-2009 that the gold market recovered and returned to a significant upward trend.
2009-2011 – blowing up the bubble?
The value of gold appreciated considerably from 2009 until September 2011 where it peaked at a record price of USD $1,900/oz. The dramatic rise over this period can be attributed to significant global financial instability post the GFC, speculative investing and a depreciating US dollar.
Although gold initially took a hit during the GFC, the volatility and uncertainty regarding the financial recovery post-GFC facilitated large scale hype investment in the precious metal. In what was widely acknowledged as a bubble, investors flocked to gold as a safe-haven store of wealth, and the depreciation of the USD over this time allowed for greater investment from foreign investors into the market.
2013 the bubble bursts!
Following the highs of 2011, the post-GFC bubble eventually deflated over the next two years, falling 30% from USD $1,732/oz in November 2012 to USD $1,215/oz in June 2013.
The downward trend was initiated by a shock USD $200/oz plunge in gold prices in April 2013 due to the Cyprus banking crisis. Investors exited the market due to fears the Cyprus central bank would liquidate its gold reserves and flood the market in order to stabilise its financial system, which was not in line with the long-term sentiment that central banks would continue supporting the gold market.
The initial price shock in 2013 impacted many small gold explorers and producers, who experienced financial and share price declines as investors exited from the commodity in search of yields in more stable markets.
2013-2018 – waiting for a dance
Post the 2013 crash, gold steadily depreciated until it reached the lowest level since October 2009 at just over USD $1,000/oz on 17 December 2015. The trend was driven by low economic demand from China, appreciating USD and further compounded by the US Federal Reserve’s decision in December 2015 to raise interest rates for the first time in a decade.
Gold holds intrinsic value to its investors, it does not generate income in the form of interest and dividends, as such higher interest rates make gold a less attractive investment and leads the market towards bonds or other fixed income yielding investments. Put simply, gold was no longer a ‘go to’ investment as greater returns were available elsewhere and so gold became relatively underweight in investor portfolios during this time.
2018-2020 – nobody puts gold in a corner
After the trough of August 2018, gold started another rally, climbing on the back of interest rates cuts by the US Federal Reserve and global uncertainty from the breakdown in trade negotiations between China and the USA. Gold closed out the decade at USD $1,520/oz and returned its mantle as a safe-haven investment that investors could flock to amid the trade war between the two economic powerhouses of USA and China.
This was further encouraged by strong demand side pressure (68% increase) for gold deposits by the emerging central banks in India, Turkey, Russia and China. The four-quarter cumulative gold buying by central banks through 2019 was the highest on record and propelled gold to near record highs.
Most recently the impact of the COVID-19 pandemic has only fuelled the rise of gold since August 2018. Global political and financial uncertainty and market volatility has driven investors back to the safe-haven asset. Although the share market has had a resurgence throughout the last half of FY20 post the initial COVID-19 outbreak shock, investors are not yet ready to abandon the gold market suggesting that the share market recovery may be more in response to monetary policy support as opposed to fundamental economic indicators. With global health and economic conditions not expected to materially improve in the coming months, investors are unlikely to be calling the last dance on gold for now.
Over the past 20 years gold has risen from USD $270/oz to a record in excess of USD $2,000/oz, a momentous climb reflective of the importance of the commodity in supporting the modern-day economy.
The same asset that was used to support various monetary systems around the globe in the 20th century remains a key element in today’s economic tapestry, with its intrinsic value and ability to weather market declines, rising inflation and depreciation of currency.
With considerable economic and financial uncertainty experienced over the past 20 years in the form of the GFC, political trade wars and the coronavirus pandemic, the worth of gold is clear. Under a backdrop of uncertainty, with shining stars difficult to observe, history tells us to look for the glitter of gold to light the way.
This report was first published as part of Deloitte’s WA Index: 20 Year Anniversary Edition.