windmills and solar panels

With 24 percent of its energy coming from renewable sources, Australia is a country to watch when it comes to renewable energy. Here's how investors can get involved.

As cultures, political movements and scientific advancements shift, the world is becoming increasingly interested in the rapidly growing renewable energy sector.

In Australia, the generation of renewable energy has risen sharply, increasing from less than 20,000 gigawatt hours in 1999 to 2020's more than 60,000 gigawatt hours.

Clearly the Australian renewable energy sector is on the rise. So how should a prudent investor navigate the industry's different opportunities? And what are the ways to approach such investment opportunities?


Renewable energy in Australia: What is renewable energy?

Renewable energy comes from natural processes, such as wind currents or moving water. It replenishes at a rate equal to or greater than its consumption, and is not used up in the same way that fossil fuels are depleted. For example, a wind turbine turns with the wind, and does not burn up the wind used to generate power.

There are many types of renewable energy. The most widely used source of renewable energy worldwide is hydro power —16.8 percent of the world's power is hydro. Wind and solar power are also very popular. There are many other sources as well, including geothermal, biomass, biogas and liquid biofuels. Solar panels absorb heat from the sun and convert it to power, while water wheels and wind turbines turn kinetic energy into electricity; for its part, geothermal power uses natural hot water sources to employ the Earth itself as a steam engine.

All in all, renewable energy is a relatively new concern. Initially efforts to capitalize on such sources were a struggle — early solar panels lacked efficiency, for instance, although hydroelectric power is an exception and has long been used by governments to augment their citizens' energy needs.

The world is taking more and more notice of renewable energy. Deals made at the United Nations, such as the Paris Agreement, which was adopted in December 2015, have instituted legally binding target numbers for lowered emissions, and a big part of the execution of those goals will be renewable energy sources.

Consequently, it is only a matter of time before the renewable energy sector grows exponentially larger. The need and demand for clean energy is rising quickly. In fact, it is hard to conceive of a world where clean energy from renewable sources is not emphasized more and more every year.

Renewable energy in Australia: How to invest

As of 2020, 24 percent of Australia's energy generation came from renewable sources. The largest sources of renewable energy in Australia are solar and wind, each accounting for approximately 9 percent of the country's energy sources (and 35 percent each of the renewable energy total). Hydro energy has remained mostly steady in terms of its overall percentage of energy generated, whereas solar and wind have been on the climb. Biomass and geothermal sources are still comparatively low in terms of percentage of generated power.

There are many utilities companies listed on the ASX that are investing in renewable energy sources. Here's a look at the five largest of them based on market capitalisation. Data was retrieved on March 31, 2022, using TradingView's stock screener, and companies are listed in descending order from largest to smallest.

1. Meridian Energy

Market cap: AU$11.83 billion; current share price: AU$4.81

Listed both in both New Zealand and Australia, Meridian Energy (ASX:MEZ) is New Zealand’s largest electricity generator through its five wind farms, seven hydro power stations and commercial solar arrays. All the electricity supplied to the company's customers comes from the electricity grid, which mixes electricity supplied from both renewable and non-renewable sources.

2. Origin Energy

Market cap: AU$11.11 billion; current share price: AU$6.23

Origin Energy (ASX:ORG) is an integrated energy company that has both renewable and non-renewable energy output. The company buys wind power from wind farms in Australia and is the nation's largest buyer of utility-scale solar. It also installs solar panels.

3. Mercury

Market cap: AU$7.55 billion; current share price: AU$5.21

Mercury (ASX:MCY) has wind farms, solar farms and combination wind-solar farms; it is also developing battery energy storage systems. Battery and power storage capabilities are essential elements for renewable energy.

4. Contact Energy

Market cap: AU$5.85 billion; current share price: AU$7.60

New Zealand-based Contact Energy (ASX:CEN) owns and operates 11 power stations and produces 80 to 85 percent of its electricity from its renewable hydro and geothermal stations.

5. Infrantil

Market cap: AU$5.57 billion; current share price: AU$7.49

Infrantil (ASX:IFT) is an infrastructure company that invests in energy, transport and social infrastructure, and has renewable investments in Trust Power, Longroad Energy, Gurin Energy and Galileo Green Energy.

Don't forget to follow us @INN_Australia for real-time updates!

Securities Disclosure: I, Ryan Sero, hold no direct investment interest in any company mentioned in this article.

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John Wilson of Ninepoint Partners breaks down the carbon credits market, from how it works to ways investors can get involved in this growing space.

John Wilson: Carbon Credits in Focus, How to Invest as Climate Concerns Rise youtu.be

Investor interest in carbon credits is growing — what should they know before jumping in?

Speaking to the Investing News Network, John Wilson, co-CEO, managing partner and senior portfolio manager at Ninepoint Partners, discussed the basics of this growing market and shared how newcomers can get involved.

As Wilson explained, there are two sides of the carbon credit market: involuntary and voluntary. The much larger involuntary market involves carbon credits that are issued by governments and trade on exchanges; in contrast, the voluntary market is subject to less oversight and is comprised of private transactions.

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Investing in Australia: Rich in Resources     Table of Contents Bitcoin Investing in Australia How to Buy Bitcoin in Australia Cryptocurrency Regulations in Australia   Bitcoin Investing in Australia Bitcoin is experiencing hype as its price continues to ride high, and Aussie investors are looking closer at ways to invest in cryptocurrencies. Debuting in …

bubbles, with the middle one reading H2

The rapid growth of the Australian hydrogen industry is being driven by massive investments in the "green" hydrogen sub-sector.

For decades, hydrogen has been hailed as a potentially revolutionary alternative to fossil fuels. Today, ASX investors are paying increasing attention to the hydrogen sector as the world's leading oil, gas and steel companies ramp up expenditure in this promising alternative energy source.

Australia, like most western nations, is determined to decarbonise its economy as part of the global transition toward renewables. Many industries now face strict targets for reducing emissions, and new technologies are being developed to produce clean, "green" hydrogen that will have a sweeping impact in diminishing the carbon footprint left by Australia's steel and coal industries.

The rapid growth of the Australian hydrogen industry is being driven by massive investments in the "green" hydrogen sub-sector as opposed to the dominant form of "grey" hydrogen that is produced via carbon energy sources.


Now, in the wake of the Russian invasion of Ukraine, the US Biden administration has banned Russian oil imports and there is growing pressure on EU countries to follow suit. This immediately thrusts hydrogen into the spotlight as a key component in a changing landscape where energy security has become a major priority in an unstable political environment.

This is the view of Dr. Andrew "Twiggy" Forrest, Chairman of Australian iron ore giant Fortescue Metals Group (ASX:FMG), which is now investing billions into green hydrogen production as part of an overall plan to transform itself into a clean energy company: "The Middle East has taught us this before and (Russian President Vladimir) Putin is teaching us this now … Green energy plans are our only energy security," Forrest said at the onset of the Russian invasion.

According to Noel Tomnay, global head of hydrogen consulting at Wood Mackenzie, low-carbon hydrogen has enormous potential to capture a growing share of the world energy market, and there is now more need than ever for major hydrogen producers such as Australia to accelerate hydrogen projects that will one day reduce dependency on any single oil and gas supplier.

"There is a serious need to expand the production of green and blue hydrogen to increase the security of supply (in light of bans on Russian oil)," Tomnay said.

Tomnay, one of the authors of a major hydrogen study on behalf of Wood Mackenzie, believes that Australia must join other countries in providing alternative energy sources, particularly hydrogen, which, like liquified natural gas (LNG), can be chilled and liquefied for transport on ships. It can also be blended with natural gas in the pipeline stream to reduce carbon emissions.

"The world needs to be buying fuel from many more and varied suppliers by reducing dependence on any one supplier. As Europe is becoming increasingly reliant on LNG, instead of importing it from just a couple of countries, you're going to need to develop green hydrogen and produce LNG from Chile and Australia and Africa and Morocco and thereby broaden the range of potential suppliers in the near and medium term."

The world’s three largest LNG importers — China, Japan and South Korea — along with the EU, have all set targets for net-zero carbon emissions. Hydrogen is an essential component if these goals have any hope of being met.

Royal Dutch Shell CEO Ben van Beurden has stated that without hydrogen in the energy mix by 2050, “we cannot aim to be a net zero economy.”

"There is lots of potential for green hydrogen in Australia, Canada, and the Middle East. It's a global market and all the new projects will be looking for global exports and additional offtake customers," Tomnay said.

Australia's virtually limitless solar power capacity also gives it a natural cost advantage over other global producers, and Australia's private sector is ideally positioned to become a leader in the production of green hydrogen.

Green, blue and grey hydrogen

Green hydrogen is defined as hydrogen produced by splitting water into hydrogen and oxygen using renewable electricity. This is a very different pathway compared to both grey and blue.

At present, global hydrogen production is almost entirely derived from the reforming of natural gas via steam methane reforming (SMR) or using other hydrocarbons such as gasified coal or gasified heavy oil residues.

Grey hydrogen is mainly produced using coal that results in very high CO2 emissions that rival that of combined emissions of UK and Indonesia. It has no value as a transitional energy source.

Blue hydrogen differs from grey in that it uses carbon capture technology to capture 85 to 95 per cent of the CO2 produced when hydrogen is split from methane (or from coal) and stores it for long term. Blue hydrogen thereby significantly reduces the environmental impact of hydrogen production; however, it is not fully effective at stopping the emissions.

This is why green hydrogen represents the future of the sector as it looks to shift away from these carbon-intensive processes. Green hydrogen leaves no carbon footprint and thereby offers the world an unlimited source of clean energy in the near future. But due to its comparative cost disadvantage, green hydrogen currently accounts for less than 1 percent of hydrogen production in Australia

This is precisely the gap that Australian energy giants such as Fortescue, Woodside Petroleum (ASX:WPL) and Wesfarmers (ASX:WES) are in the process of filling with various green hydrogen projects.

FMG Chairman Forrest has no doubt that his massive commitment to green hydrogen is exactly the kind of clean energy strategy that the world needs if it is to avoid the worst effects of climate change.

"It’s like being there at the beginning of the industrial revolution," he said. "Someday you’ll look back and say, ‘I was there.' Global warming … is really serious, and it’s accelerating a lot quicker than anybody thought … I’ve been in mining for 20 years, and nothing has really changed until now. (But) if you are responsible, you must act."

Meanwhile, Woodside has unveiled plans to produce hydrogen at three locations in Australia and overseas. The H2Perth hydrogen facility in Western Australia announced in October last year is expected to begin operations in 2027. It will produce over 500,000 tonnes of hydrogen per year.

The initial phase of the project would produce a combination of blue and green hydrogen, but Woodside CEO Meg O'Neill has stated that "H2Perth is designed to be net-zero emissions for both Woodside and its customers," and that 100 percent of carbon emissions will be either stored or offset.

Wesfarmers' wholly owned subsidiary Coregas, a leading gas producer, is participating in the Hydrogen Energy Supply Chain (HESC) gasification plant in Latrobe Valley, Victoria. Coregas intends to ship the hydrogen produced at this facility to Japan and eventually turn it into the largest hydrogen hub in the world

Australian government commitment to hydrogen

In 2019, Australia unveiled its National Hydrogen Strategy, which seeks to stimulate the development of the hydrogen sector and encourage its leading corporations to invest in hydrogen projects. Last June, the government announced that it will be investing AU$1.4 billion in the country's hydrogen industry as part of an effort to turn Australia into a major global player by 2030. To that end, Prime Minister Scott Morrison announced a joint hydrogen development program with Germany.

Under the terms of this agreement, Australia will gain access to highly advanced German hydrogen technology that will help Australia build up its capacity to export significant quantities of hydrogen to Germany as part of the European superpower's policy of reducing reliance on fossil fuels.

Australia is also partnering with Japan on the development of new hydrogen fuel cell technology and the establishment of the world's first clean liquefied hydrogen export pilot project. In addition, important bilateral agreements have been reached with Singapore (accelerating low emissions technologies) and Korea (collaborating on research into hydrogen supply chains and low and zero emissions technology).

Though Australia is primed to become one of the world's leading hydrogen producers, there are major issues on the demand side of the equation. Martin Tengler, senior hydrogen analyst at BloombergNEF in Tokyo, believes that the future market for Australian green hydrogen is still much less than what is needed to soak up the supply once many of the new production facilities come on line.

"My outlook for Australia is that there are many projects for clean hydrogen in the pipeline and most are geared towards the exporting hydrogen in the form of ammonia and towards exports to Japan and Korea," Tengler said.

"But these projects face an uncertain future, however, because Japanese demand needs to pick up in order to absorb all the planned supply from Australia. It is great that Australia has all these projects in development but the challenge going forward will be to find enough demand."

Tengler, one of Asia Pacific's leading experts on the global hydrogen industry, is highly impressed with all the new Australian initiatives in the field but warns of possible bottlenecks down the road.

"Fortescue, for example, needs to find buyers willing to sign long-term contracts for the green hydrogen it intends to produce over the long term. This is the biggest challenge they are facing."

Currently, the hydrogen market is valued at over US$100 billion and issued widely as an industrial chemical, mainly by the petroleum industry, for the production of ammonia, a principal ingredient in the manufacture of nitrate fertilizer. There is also growing demand for hydrogen by companies anxious to harness its properties as an effective means of storing power. But none of these applications for hydrogen compare to its extraordinary potential as a viable, clean-energy fuel for transportation, particularly in trucks, airplanes, and ships.

These essential means of transportation are difficult to decarbonise due to the weight of batteries and their inability to hold sufficient charge for long-haul trips. Hydrogen, however, offers a much lighter alternative as a clean-burning fuel that would go a long way to eliminating carbon emissions in the transport sector.

"Australia has a lot of renewables and a lot of states have ample room to place solar panels and build windmills," Tengler said. "But the biggest challenge is to find enough buyers because of the shipping costs and distances involved. And there will be competitors from Spain in the Iberain Peninsula, Chile, Namibia, Brazil and Canada. They all want to sell hydrogen to Japan and Korea … I would be wary about hydrogen export potential from Australia for the time being until Australian exports are able to sign long term export agreements."

Don’t forget to follow us @INN_Australia for real-time updates!

Securities Disclosure: I, Harold Von Kursk, currently hold no direct investment interest in any company mentioned in this article.

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The Investing News Network (INN) spoke with analysts, market watchers and insiders about which trends will impact this sector in the year ahead.

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What is decentralised finance and what should investors know about this space in Australia? Find out here.

DeFi, short for “decentralised finance,” is a promising component of our brave new crypto world. The DeFi sector in Australia is here to stay, but what should investors know about this space?

DeFi offers an alternative to traditional financial services and institutions by bypassing banks, brokers, exchanges, and other “middlemen” which serve as financial intermediaries that regulate the markets. In effect, DeFi is evolving into a parallel financial framework that facilitates and records transactions involving financial instruments and payment mechanisms chiefly related to trading and lending operations.


The DeFi market is currently expanding at an explosive rate. According to figures released by DeFi Llama, cryptocurrency investors have put up $250 billion worth of assets as collateral in various DeFi projects, funds which are then lent out in the form of cryptocurrency loans. As more and more institutional investors enter the DeFi sector, the market is expected to expand to $800 billion by the end of 2022.

Bitcoin and Ethereum, the world’s two leading cryptocurrencies with market caps of $882 and $421 billion, respectively (as of the beginning of April), are digital assets whose ownership is documented in a public transaction ledger known as the blockchain. A traditional financial institution such as a bank, credit card provider or payment facilitator like PayPal, maintains its own private records and uses its own servers to process transactions. Cryptocurrency transactions, by contrast, are processed on the computers of a global network of users and recorded publicly (though pseudonymously) for the entire network to see.

As currently constituted, the emerging DeFi sector provides holders of cryptocurrency the ability to bypass the world’s traditional network of bank and other financial gatekeepers by means of independent, self-regulating computer programmes that rely on blockchain technology.

These decentralised applications (DApps) of blockchain technology offer a more efficient and streamlined mechanism to access financial services by creating an alternative ledger system known as “distributed ledger technology” (DLT) as opposed to VISA, PayPal, or other legacy digital payment services. By harnessing the power of blockchain, a new global ledger system has taken shape that relies on a global web of interconnected computers to record and track all transactions. Not only does DLT store such transaction data but it also identifed the parties involved in any transaction.

This allows anyone with a crypto wallet and an internet connection unlimited access to DeFi services. Users can trade currencies and move assets whenever and wherever they want and avoid antiquated and cumbersome bank transfer protocols and related fees. DeFi users are however required to pay “gas fee” charges for crypto transactions in many cases.

DeFi is thereby expanding the fundamental premise of digital money – Bitcoin and other cryptocurrencies – by allowing individuals and companies alike to execute financial transactions by means of a new and fully transparent system.

DeFi Applications

Lending platforms

The DeFi market is currently expanding at an explosive rate. According to figures released by DeFi Llama, cryptocurrency investors have put up $250 billion worth of assets as collateral in various DeFi projects, funds which are then lent out in the form of cryptocurrency loans.

Parallel to the expansion of the cryptocurrency market, DeFi will become increasingly able to provide loans via the various lending platforms that are popping up around the world. In effect, DeFi lending platforms are digital banks, taking money from cryptocurrency depositors and lending it out to borrowers.

Instead of traditional bank loans, the DeFi platforms rely on “smart contracts” – primarily the Ethereum blockchain – which uses computer code to authorize, execute and verify transactions.

Lending markets serve as one of the most intriguing and promising applications of DeFi by connecting borrowers to lenders of cryptocurrencies by means of platforms that enable individuals or companies to either borrow cryptocurrencies or provide crypto loans.

In order to obtain a loan, borrowers must put up collateral – usually ether, the crypto currency issued by Ethereum, the principal system on which all cryptocurrency applications are based. Borrowers tend to receive loans in the form of stablecoins pegged to traditional currencies like the dollar.

Alternatively, borrowers can post collateral in the form of Bitcoin, which then gets depositied in a crypto pool that is overseen by a smart contract. Should the price of Bitcoin take a precipitous fall, the smart contract automatically liquidates the collateral to protect depositors who have provided the loan funds in the form of stablecoins. Meanwhile, lenders earn money from the interest rate the platforms charge for lending out their funds.

Decentralised exchanges

Decentralised exchanges use smart contracts to enable traders to execute orders without an intermediary. Users trade directly from their wallets by exchanging one currency for another, e.g. Bitcoin for US dollars, euros for Ether, by means of the smart contracts behind the trading platform. Traders are solely responsible for managing and securing their funds and risk losing their holdings if they lose their private keys or send funds to the wrong addresses. The advantage of bypassing financial intermediaries and preserving anonymity is offset to a degree by the lack of security a bank or a centralized exchange provides.

Stablecoins

A stablecoin is a cryptocurrency pegged to the value of a non-crypto asset (i.e. the US dollar) that offers price stability which in turn provides greater security for DeFi collateralized lending. Tether is one of the leading stablecoins.

Australia: Making a splash in DeFi

Australia currently ranks 12th out of 154 countries according to the Global DeFi Adoption Index published by Chainanalysis. This index uses three metrics in its assessment of DeFi adoption: On-chain cryptocurrency value received by DeFi platforms weighted by PPP per capital; total retail value received by DeFi platforms; and individual deposits to DeFi platforms.

Australia’s DeFi sector is currently experiencing a boom led by various companies such as Synthetix (SNX), which hopes to become a decentralised version of derivatives exchange BitMEX, Maple Finance (MPL), which offers loans for crypto institutions, and newly launched Tiiik, which offers a digital wallet that allows investors to earn interest on DeFi products. Other new Australian DeFi players include Thorchain, Ren and mSTABLE.

While the DeFi sector is currently in its first develomental phase much like Bitcoin in its early days, individual investors have three main ways of investing in this evolving industry. First, one can obtain cryptocurrency-based loans; second, one can earn interest (by lending (staking) their crypto holds, looking to invest in DeFi coins. (Block Earner, for example, is an Australain fintech outfit that provides a DeFi online savings platform which pays 7 percent interest on deposits.) Third, investors can simply invest in DeFi coins in the same way that one can purchase cryptocurrencies.

Evolving market

Investors willing to take a plunge in DeFi should be aware that the underlying volatility of the cryptocurrency markets can rattle the DeFi sector in the event of sharp declines in Bitcoin, Ethereum and other cryptos. There is also the added spectre of rug pulls, a relatively rare but catastrophic form of fraud.

Rug pulls see unscrupulous DeFi developers create a new token, pair it to a leading cryptocurrency such as tether, set up a liquidity pool, and then use secret back doors encoded into the coin’s smart contract to mint millions of new coins before liquidation. This was the case in 2020 when SushiSwap developer Chef Nomi cashed in his SUSHI tokens after raising over a billion dollars in collateral finance which caused the price of SUSHI to crash to near zero.

Don’t forget to follow us @INN_Australia for real-time updates!

Securities Disclosure: I, Harold Von Kursk, hold no direct investment interest in any company mentioned in this article.

Interested in the relationship between the gold price and the ASX? Here’s how the two interact and how you can benefit from it.

As the gold space becomes more prominent in Australia, it can be beneficial for investors to understand the unique relationship between the gold price and the ASX.

The two sources of trade are able to push and pull one another, although in general the price of gold tends to indirectly follow the movements of the ASX.

Read on for a breakdown of gold’s history in Australia and what’s currently affecting the price of gold. We’ll also explain the relationship between gold and the ASX, and how you can benefit from it as an investor.


Gold price and the ASX: The history of gold in Australia

Gold’s significance in Australia began in 1832 with James McBrien, who found traces of the yellow metal near Bathurst, New South Wales. However, for the most part, early discoveries of gold were kept under wraps, because authority figures were concerned that convicts, soldiers and public servants would abandon their work and other responsibilities to search for the metal.

That changed in 1851 when Edward Hargraves and his colleagues found gold, again near Bathurst. This time, the discovery was made public, and within a month, close to a thousand men were searching for the metal in an area called Ophir, named after the biblical story about King Solomon’s gold city.

There were more gold discoveries in the state of Victoria in 1854 following the rush in Bathurst. Tens of thousands of immigrants from around the globe headed to the Australian colony in search of the yellow metal, with Ballarat and Bendigo in Victoria becoming major gold sites.

Between 1848 and 1858, Australia’s population tripled to more than 1 million people. Gold fever then hit Coolgardie and Kalgoorlie in Western Australia in the early 1890s, when key discoveries were made in those areas.

During this time, exciting gold finds were spurring the development of inland towns, communications, transport and foreign trade. In fact, since Australia’s first recorded gold discovery, the metal has changed where and how people live within the country. Many towns were developed using wealth generated from mining gold, and Australia is also home to ghost towns that were deserted when the gold sources that kept them afloat ran out.

Even though the precious metal has made large contributions to Australia’s development, its importance declined during most of the 20th century as other metals became more prevalent and economically significant. Gold later underwent a resurgence in the 1980s and 1990s, when the use of new technology allowed lower-grade ores to be processed economically.

Today, Australia is stepping back into the spotlight as one of the most prolific gold-mining regions in the world. In terms of gold prices throughout the years, the metal has experienced a mostly upward trajectory in Australian dollars.

Gold price and the ASX: What’s moving the gold price

At the start of 2022, the gold spot price was around AU$2,500 per ounce, which is much higher than it was almost 20 years ago. In the year 2000, gold hit AU$481.68, a high at the time, and 10 years later it was still climbing, breaching the AU$1,400 mark.

The metal made more gains between 2009 and 2011 before backsliding. However, the downturn did not last long, and by 2015 gold prices were slowly ramping up again, reaching its highest in August of 2020 at AU$2,618.67.

performance of gold price from 2006 to the present

Performance of gold price from 2006 to the present.

Chart via TradingView.

While there are a variety of factors that influence the price of gold, some have more weight than others. Below is a guide on the main elements that are shifting and shaping the price of metal.

The Australian dollar

The first element supporting the yellow metal is the fact that the Australian dollar did not have the strongest year in 2020. In general, as the dollar declines, the yellow metal will see an upward price movement.

performance of gold price and Australian dollar from 2006 to the present

Performance of gold price and Australian dollar from 2006 to the present.

Chart via TradingView.

Reserve Bank of Australia

Much like with the US, interest rates have been raised in Australia as of late. In May 2022, the central bank lifted rates for the first time since 2010 by a quarter point basis, with investors expecting it to continue to increase rates at that pace.

However, following its June policy meeting, the Reserve Bank of Australia moved its cash rate by 50 basis points to 0.85 percent — its highest hike in 22 years.

Gold tends to retreat directly after rates are increased, but it is not always the case. Higher interest rates make stocks, government bonds and other investments more attractive to investors.

reserve bank of australia\u2019s interest rates from the past five years

Reserve Bank of Australia’s interest rates from the past five years.

Chart via Trading Economics.

The United States

The ongoing trade war between the US and China has affected overall global markets, and in Australia it has sent investors running towards the safe haven nature of gold. The spat between the two powerhouse countries has been ongoing for four years, causing a tariff tit-for-tat that has resulted in volatility in the markets.

These tensions have been eased slightly in recent years by the signing of a phase one trade deal in January of 2020 between the two nations, and recent talks between the leaders of both countries.

Geopolitical events

Any time global tensions rise, the price of gold will rise as well. Usually, these events only trigger a short-lived rise in precious metals like gold, as investors turn to gold for a safe investment in the face of international conflict. Most recently, the war in Ukraine has caused gold prices to shoot up.

It’s likely that gold prices will continue to be volatile depending on how the war progresses. However, if historical precedent stands true, the support for gold will be short lived and drop once tensions ease and the need for a safe haven investment goes through a correction.

performance of gold price during the 2014 crimean annexation by russia

Performance of gold price during the 2014 Crimean annexation by Russia.

Chart via TradingView.

The above chart displays the price of gold in Australian dollars during the 2014 Russian invasion of Ukraine’s Crimea peninsula. It shows how the price of gold soared during February and March, when the invasion took place. After this period, gold returned to its previous trend. Although the current events are of a much larger scale and predicting how they will develop is impossible, the past history of gold’s price during geopolitical conflict is worth considering.

Bond market and exchange rate

Another element that is currently affecting the price of gold is a dwindling 10 year government bond yield. Since 2008, 10 year yields have dipped from over 6.59 percent to a low of under 1 percent in 2020. Currently, 10 year bonds are recovering from the pandemic low and sit at 2.77 percent.

australian government 10 year bond yields since 2006

Australian government 10 year bond yields since 2006.

Chart via Market Watch.

Compared to US 10 year yields, which have fallen from 4.05 percent to 2.47 percent over the same period, it is clear that the Australian bond market has taken a larger hit. Because of this, the exchange rate for Australian and US dollars has fallen and has led gold to outperform in Australian dollars.

“The bottom line is that, while the AUD gold price is high, it’s entirely justified why it is trading above AU$2,000 per ounce. Whether it’s a faltering local economy, a fragile property market, negative yield differentials, low and falling rates or a weakening currency, there are many good reasons why astute investors typically allocate 5 to 10 percent of a diversified portfolio to gold. The strategic case for gold is as strong as ever,” the World Gold Council explains.

Gold price and the ASX: How gold affects the market

Gold’s relationship with the ASX is unique in that the metal indirectly follows the movements of the market, as opposed to resources like oil and gas. The yellow metal has the tendency to be viewed as a counter-cyclical asset, which means that its value increases during market downturns.

Due to gold’s large global presence and high intrinsic value, the precious metal is often seen as a universal currency. When the outlook of the equity market looks bleak, or corporate earnings are destined for doom, investors will flock to the precious metal.

On the flip side, when the economy, and in turn the ASX, is on the rise, investors tend to abandon the yellow metal in favour of equities.

However, this is not to say that the relationship between gold and the ASX is a negative one. It is more of a give-and-take commitment. The metal continues to have an impact on jewellery and jewellery-related products. Additionally, gold is used in dentistry, aerospace and electronics — all of which affect publicly traded companies and as a result the ASX.

This relationship between the gold price and the ASX has turned the precious metal into something of a hedge when it exists within an individual’s portfolio as a source of diversification, which is when market participants hold investments that are not related to one another.

Since gold has a history of having a negative correlation to stocks, bonds and other financial instruments, it becomes important that investors get diversified by owning a portfolio that combines gold with stocks and bonds in order to reduce both volatility and risk. While it is true that the yellow metal goes through times of volatility, its spot price has always maintained its value over the long term.

This is an updated version of an article first published by the Investing News Network in 2020.

Don’t forget to follow us @INN_Australia for real-time updates!

Securities Disclosure: I, Matthew Flood, currently hold no direct investment interest in any company mentioned in this article.

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