Recent inflation data, coupled with the Reserve Bank of Australia’s (RBA) reiterated sentiment around holding rates higher for longer, could see gold emerge as a “strategic component” in Australian portfolios, according to Ray Jia, senior research analyst at the World Gold Council (WGC).
Reflecting on market expectations in recent months, he noted June’s inflation figures had served as a pleasant surprise after two consecutive months of hotter-than-expected Australian CPI prints.
The headline trimmed mean inflation came in at 4.1 per cent year-on-year, down from 4.4 per cent in May. Meanwhile, the RBA’s Q2 trimmed mean inflation figure was down to 3.9 per cent year-on-year, lower than both Q1’s 4 per cent and the consensus 4 per cent.
These signs of deceleration “encouraged investors”, Jia observed, as market expectations “took a 180-degree turn” from rate hikes to potential rate cuts by the end of 2024.
However, these expectations were short-lived after the RBA’s latest meeting on 6 August, he said, as the central bank chose to hold rates for the sixth consecutive time and emphasised potential upside risks to inflation.
Shortly after, at the RBA’s post-meeting press conference, governor Michele Bullock also confirmed a near-term reduction in the cash rate “doesn’t align with the board’s current thinking” in the next six months.
“As a consequence, future rate path expectations in Australia have changed yet again,” Jia said, pointing out that it held two major implications for Australian portfolios. First, the correlation between bonds and equities is likely to stay high in the near term, he cautioned.
“We have been witnessing such a pattern between 2022 – when the RBA started hiking – and now,” he said.
Also, government bond yields may become volatile depending on the RBA’s sentiment shifts and the course of inflation, Jia continued, with macro uncertainties looking to keep local bond volatility at its multi-year high.
“This will likely have implications for Australian portfolios. Recent rapid changes in yields, amid notable shifts in rate expectations and the turbulence in equities, have led to a volatility surge in a traditional 60/40 portfolio,” Jia said.
Against this backdrop, gold could emerge a strategic component in portfolios, offering diversification benefits.
“Unlike bonds, gold has demonstrated a consistently low correlation with Australian equities. This is mainly because gold’s valuation is not determined by any one country thanks to its diverse sources of demand – which spreads across regions and sectors – and supply,” the analyst said.
The commodity has already generated double-digit returns of 22 per cent year-to-date, outperforming most other asset classes, despite perceptions that gold “generates no returns”.
It also hit a record high of US$2,480 per ounce in mid-July, driven by lower 10-year Treasury yields and, to a lesser extent, a weaker US dollar, according to the World Gold Council’s Gold Return Attribution Model.
“Gold has, in fact, been the top performer among major global and Australian assets so far in 2024,” Jia said, noting strong global central bank buying, robust Asian investment demand, and elevated geopolitical risks have all supported gold’s performance in the first half of the year.
“And it is worth noting that gold has generated positive returns every year since 2016, averaging 10 per cent per year in AUD,” he added.
Looking ahead, as geopolitical risks loom, financial markets face increased volatility, and Australia’s future path of interest rate appears uncertain, gold looks to be an ideal asset to enhance return and reduce risk in Australian portfolios, Jia said.
Earlier this month, the WGC found that July marked the strongest month for global gold ETFs since April 2022, with Western funds leading the way with inflows.
It noted gold ETFs attracted US$3.7 billion in flows last month, marking the third consecutive month of inflows.
Australia recorded inflows of some US$26.3 million, “likely fuelled by a strong gold price performance in the depreciating local currency”, to bring total AUM to US$3.2 billion.
