The strong correlation between gold prices and the Australian dollar has impacted unhedged gold exposures which have consistently under-performed hedged gold exposures historically, analysis by BetaShares shows.
For example, while spot gold prices surged 74% in the period December 2008 through end May 2011, unhedged spot gold returned only 14%. This is because a rise in the value of the Australian dollar eliminated much of the benefit of the rising value of gold (which is priced in US dollars).
Drew Corbett, Head of Investment Strategy & Distribution at BetaShares said that while gold demand is currently at unprecedented levels, many investors do not realise that a historical relationship exists between the price of gold bullion and the Australian dollar.
“By analysing the movements in the gold spot price and the AUD/USD exchange rate we have found that, generally speaking, over the last 3 decades, when the price of gold bullion has risen so too has the Australian dollar relative to the US dollar,” he said.
“Gold is widely regarded as a currency in its own right and thus, during times of US dollar weakness, gold often increases in value as many investors choose to own gold rather than US dollars. Similarly, the Australian dollar is also likely to strengthen during times of US dollar weakness. In addition, Australia’s role as a major producer of gold and other commodities means the Australian dollar is seen globally as a “commodity currency”. Accordingly, strengthening prices for commodities (including gold) have a tendency to push the local currency higher.”
“The tendency for gold and the Australian dollar to move together has negatively affected local investors with unhedged exposures to gold. At BetaShares, we recognised this relationship and listed the first currency hedged gold ETF on the market,” said Mr Corbett. “If the US spot price of gold rises 10%, investors in the BetaShares ETF can expect a 10% gain, too, before fees and expenses.”
“If an investor has a bullish view on gold, it is our view that investors should look for pure exposure to gold which necessarily involves hedging the currency” Mr Corbett concluded.