First, on the commodities markets, gold is traded in U.S. dollars (USD). With a constant gold price in USD, a rise of the Australian Dollar (AUD) against the US Dollar (AUD/USD) makes gold cheaper for Aussie investors.
Symmetrically, a decline of the AUD/USD makes gold more expensive for them. This foreign currency (FX) effect (also known by traders as currency risk) is a real matter for local investors.
FX markets in general and the Australian Dollar in particular had impressive volatility in 2008, especially during the second half of the year. If it continues in 2009, you'll want to understand the relationship in order to devise your own gold strategy.
On the chart above, the black line represents gold in Australian dollars (we called this composite "Aussie gold"), while the green bars represent the currency pair AUD/USD. There are three different phases that are distinct.
1) Phase 1 from August 2007 to March 2008 where "Aussie Gold" climbed sharply despite the fact that the AUD/USD exchange rate was rising too. It means that at the same time, gold prices in USD were rising faster than the AUD/USD.
In details, it means that, the AUD/USD ( how many US Dollars for ONE Australian Dollar) rose by 11% roughly between September 2007 and March 2008. For the same period, gold (therefore how many US Dollars for ONE ounce of Gold) rose by 31%
As a result, both the AUD and gold appreciated against the USD, but gold appreciated much faster. That's why the Aussie gold price (how many Australian Dollars for ONE ounce of gold) also climbed sharply. What does it all mean? It means that gold appreciated against AUD!
The Aussie gold price is a function of the velocity of the AUD/USD compared to the velocity of gold. If AUD/USD appreciates faster than gold, then the Aussie gold price declines. If gold appreciates faster than AUD/USD, then the Aussie gold price rises.
2) Phase 2 from March 2008 to September 2008 where the "Aussie gold" was cheaper as gold in USD was correcting while the local currency jumped to historical highs until July, then crashed.
3) Phase 3 from September until now where gold prices on the international markets are consolidating and rising again whereas the AUD/USD has been falling to low levels not seen since 2003. As a result, the "Aussie gold" is soaring.
Since last October, we can see that the Aussie gold price is reaching historic highs. Because of the crash of his currency on the FX markets, a local must pay today $1,250 AUD to buy an ounce of gold. At mid-August last year, the cost for the same ounce was only $917 AUD. It's a 36% increase in 5 months!
What is the conclusion of that?
Well, we have calculated the correlation between gold and the Australian currency, both the strength of their relationship and the degree of their relationship. From 1991 to date, this correlation is equal to 81%. Gold and the Aussie are positively correlated, as they typically move in the same direction because they are both traded against the US Dollar. But they don't move at the same pace. And this is that difference of pace or velocity that drives the Aussie gold price.
On a historical basis, a strong Australian dollar is NOT a 100% guarantee of a cheaper gold for local investors, but it is clearly often the case.
That's why if you want to buy gold, I would suggest you to wait for the Aussie gold price to correct. Currently these are the historical highs. If we have a look at the Aussie gold itself on a weekly chart (above), the MACD shows that the bullish momentum is likely to be over. It has peaked at unprecedented high levels on early January and has already started to curve downward.
Historically a similar configuration happened twice, in May 2006 and March 2008 (circled on the chart). If the MACD crosses below its signal line, it would be a clear signal of trend reversal, and would drive the Aussie Gold much cheaper. We will keep an eye on that in the coming weeks!
Gabriel Andre
for The Daily Reckoning Australia
P.S. to get The Daily Reckoning direct to your inbox sign up to our free e-mail newsletter or if you prefer to use RSS, subscribe to the Daily Reckoning RSS feed.
Related Articles:
- The Aussie Dollar as a Measure of Global Risk Appetite
- Prices of Gold in the Top 10 World Currencies
- Gold – All About the Dollar?
- Gold, the Dollar and Inflation
- Gold Are You In Or Out?
About the Author
A former Futures and FX trader/portfolio manager, Gabriel Andre has worked in several hedge funds and asset management firms, both in Europe and Australia. He is a contributing editor to both Diggers & Drillers and the Australian Small Cap Investigator.
Comment by Pete on 4 February 2009:
Wow Gabriel, simplifying the AUD into a simple gold correlation graph. Brilliant...but super flawed.
How about instead of being silly and trying to predict BOTH the AUD movement AND the price of gold, you instead just tell us what you think the AUD will be priced at based on some actual logical conclusions, such as the China boom, investment in Australia, international investment risk, etc.
See, I 'assume' the AUD is on its way down again. Sure, gold might go down too. But I think the AUD will go down more. Which makes me think, hmmm, so in relative terms, if the AUD goes down more than gold, then gold is still appreciating in AUD terms and i'll still pay more if I buy with a lower AUD. Doh!
But then if the USD depreciates against the AUD, will gold appreciate? I think that is very likely as gold stays fairly constant against currency (?).
I'm probably a glass half empty kind of person.
So if you wait for the AUD to go down...then up again...you'll probably still lose, because gold is likely to have gone up in the meantime. Assuming there is no huge correction.
Anyway, thanks for not much Gabriel, I hope someone got some value from this article
Comment by Pete on 4 February 2009:
Oh, and as for basic current conclusions on past trends, aren't we a bit above that now? I mean, that kind of thinking is what got us into the GFC in the first place.
Comment by jeff on 8 February 2009:
Hey will the aussie dollar go down more?
Comment by JOHN RICHARDS on 13 February 2009:
WHAT DO YOU THINK OF F.M.L
Comment by chris on 14 February 2009:
Gold is going to hit $2000-$4000/ounce in the next 12-18 months
USD is going to crash
Comment by Russell on 16 February 2009:
I'll just stick to trading currencies... I don't care which way the AUD goes compared to other currencies. As long is it moves, I can trade.
The more volatile the markets become (up OR down) the more opportunities we get to place trades.
Comment by Steve on 20 February 2009:
The article is valid in trying to bring attention to USD/AUD state of affairs when buying gold in AUD, which is kind of important for us down under.
You can end up buying gold which is likely to keep going up - but in USD - and still actually "lose". That can happen if AUD stages even a slight recovery against USD, which is completely possible.
For example, the one year performance of gold (from now) in USD is only about 6% up. In AUD terms its like 50%.
What is missing here is the chart of price of gold in AUD and USD.
Comment by Tel on 21 February 2009:
You completely ignore the recent Australian interest rate cuts. Obviously the AUD is less attractive to investors when RBA interest rates are low and the official statement is that they won't hesitate to cut rates further. Meanwhile the Rudd government has gone into deficit and fully intends to keep spending. The AUD can't return to strength until we get far enough round the economic cycle for interest rates to be on the rise again and government to be pulling in at least enough tax to cover expenses.
Although there is room to play at short term gains riding local fluctuations, intrinsics always win in the bigger picture.
As for USD/AUD variations, the AUD has been taking its medicine but the USD has just been putting off the inevitable. AUD will bottom out first (hasn't happened yet) while the USD is just at the start of a long and scary ride down. China don't want the USD to crash too bad because they don't enjoy the instability but all China can do is slow down the inevitable. Rather than a rapid nasty USD crash, we will see a drawn out downward spiral, probably going on for years.
Comment by The Outback Oracle on 11 March 2009:
Tet...the USD will go down against what? Euro $A whatever currency? Commodities generally?
Comment by Coffee Addict on 11 March 2009:
Over time, increased global money supply will collapse most leading currencies against the value of commodities (regardless of how low the demand for commodities happens to be when this happens). Debtors will attempt to inflate their woes away.
This possible scenario does not imply a commodity price recovery (in real terms). Being a pseudo index of (relative) commodity prices, I expect the AUD to rise in value - relative to over currencies. In a global race to a currency bottom, a relatively high AUD won’t bode well for the economy?
This could mean anything for gold I guess.
Comment by The Outback Oracle on 11 March 2009:
CA Please understand I am not being a smart-alec here. You seem to think a bit and I'm interested in your process. Do you think we can run CAD's ad infinitum? Having sold about 80% of our Mineral resources off, pretty well all the food chain, and most industrial processes of any scale, do you see any limit, in time or money, to the extent we can continue to sell the National assets in order to finance the CAD?
It seems this is the National attitude except for me, Max Walsh, Steve Keen and one or two others. I'm really curious as to the logic. As my son tells me I have to stop investing according to how things are rather than how they OUGHT to be.
Comment by Coffee Addict on 11 March 2009:
Hi Outback. I'm not an expert on any of this. I just use this forum to sort a few ideas out.
Ever expanding CADs are, I guess, bubbles just like any other. Normally when a CAD bubble goes pop the fiat currency will go with it. However, with "quantitative easing" happening in all the major economies the AUD won't necessarily go pop in this way - even if Australia's CAD escalates.
A key side point is that the government expenditure increases do no more than (partially) counter decreases in private sector expenditure. I don't know if anyone can really say where future CADs are likely to go.
I sometimes read what Steve Keene has to say – his blog would be a good place to put some of these issues into (an Australian) context.
PS: I liked the way you separate the real agenda from the propaganda surrounding the first home ownership scheme. On a much bigger scale its a similar situation in the US.
I understand that the US Government can't allow house prices to collapse further (as some classical economic theorists would like). To do so would put just about every American mortgage underwater and this (it is argued) would trigger a 1930’s style banking system collapse. All the US can do is print money to keep nominal house prices relatively stable. Money printing won’t however get rid of the “real” losses incurred by the banks. Cheers!
Comment by The Outback Oracle on 11 March 2009:
Correction on my son's advice...I have to stop investing on how things ought to be and look at how things actually ARE!
Comment by Nyoman Ramayanta on 30 March 2009:
please advice me to find the pair of AU(GOLD)/ USD CHART ?
thanks