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Low interest rates favour gold

SMSF investors should consider an allocation to gold in light of the poor returns term deposits and cash were currently delivering in the low interest rate environment in Australia, according to a chief economist.

“Low interest rate environments such as the one Australia is experiencing are typically the sweet spot for gold,” ABC Bullion chief economist Jordan Eliseo said.

“Long-run data highlights that the average return on physical gold is over 20 per cent per annum in years where inflation-adjusted interest rates are below 2 per cent, like they are today,” Eliseo explained.

He said there had been an increase in demand for gold as a result of the fall in the cash rate of 500 basis points since the levels experienced following the global financial crisis in 2008.

Gold, in comparison to cash-based products, did not generate a yield, but the capital gain associated with the asset made up for that, he said.

In early March the precious metal was trading at A$1558 an ounce, up from A$949.50 an ounce at the start of 2008, representing a return in excess of 50 per cent. The asset class had outperformed property and equities over an extended period of time, Eliseo said.

“The capital appreciation, and the long-run inflation protection, makes up for the lack of income, with gold rising by more than 8 per cent a year since the turn of the century,” he said.

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