Thank Your Lucky Southern Cross for Aussie Gold
There are many remarkable insights in Jim Rickards’ book The New Case for Gold.
This bonus chapter will turn them into specific, useful and potentially profitable advice for you as an Australian.
As you’ll discover, Australians are uniquely poised to benefit from Jim’s analysis to a far greater extent than anyone else in the world.
You don’t have to finish the book before you start reading this bonus chapter. They certainly complement each other though. You can think of this as the local guide to Jim’s ideas and analysis.
There are two reasons I’ve come onboard with Strategic Intelligence. The first is Jim Rickards. Nobody in the newsletter industry has his insight, contacts and experience. Nobody.
A few years ago I sat opposite Jim at a dinner. It was after a conference we both spoke at in Sydney. He’s exactly the same guy behind the scenes as on stage. He just gives a little more away when he is “off the record”. Because he’s the same person behind the scenes, I think he’s genuine. I’m willing to put my reputation on the line alongside his. I trust him.
The other reason I’ve come onboard with Strategic Intelligence is gold. Jim Rickards is a long-time fan of gold. He thinks you should own it and governments should peg their currencies to it.
As he puts it in his book:
“Gold is money, monetary standards based on gold are possible, even desirable, and that in the absence of a gold standard, individuals should go on a personal gold standard, by buying gold, to preserve wealth.”
But it’s not gold by itself that’s so enticing. Aussie gold investors are better placed than literally anyone globally to invest in gold. There’s a simple reason for this — our currency.
The Aussie Case for Gold
Australia is a highly developed country. But our economy is built on commodities. And commodities are risky bets. They fluctuate heavily in price. Put the two together and you’ll understand why our currency has big swings too.
Our currency is what’s known as a “risk on” bet. We do well in the world economy’s good times, and our currency goes up in value. We do badly during poor times, and our currency falls fast.
This currency instability, combined with Australia’s legal and political stability, means Aussie investors are best placed globally to benefit from owning gold.
Why? Gold is priced in US dollars. The Aussie gold price is the US dollar gold price, adjusted for the exchange rate to Aussie dollars. This creates a uniquely beneficially position for Aussie investors.
Let me explain…
The Gold Quadrants
Yes, the name is a bit obscure. But stick with me. You need to understand this if you want to understand just how beneficial gold is to the Aussie investor.
The Aussie Gold Quadrants are the four possible outcomes when you invest in gold. The gold price in US dollars can go up or down. And the exchange rate, which gives you the Aussie dollar gold price, can go up or down too.
Two variables give you four possible outcomes.
Say the gold price in US dollars goes up 5% and the Aussie dollar goes up 5% too. That leaves the Aussie dollar gold price with no change. That’s because the gains in gold are cancelled out by the lower amount of Aussie dollars you get for your US dollars.
This is only one of four possibilities…
I’ve put all four possibilities in this table — the Aussie Gold Quadrants Table.
It shows all four possible outcome for Aussie gold investors. What I call “the four quadrants”.
|Aussie dollar goes up||Aussie dollar goes down|
Gold price goes up
You profit from the gold price but lose money on the exchange rate
You profit from gold and the exchange rate
Gold price goes down
You lose money on gold, and lose money on the exchange rate
You lose money on the gold price, but make money on the exchange rate
The thing to understand is that these four quadrants are not equally likely to occur. Here’s why…
Gold and the Aussie dollar tend to move together or in opposite directions depending on the economic environment. They react differently to different forces in a way that benefits you.
The Aussie dollar is a risk currency. That means investors buy Aussie dollars when they want to invest in risky assets, and sell when they want to protect their wealth.
Gold is considered a safe haven. It spikes when risks in the economy rise, and is sidelined when the economy is considered stable.
This combination of characteristics makes gold a brilliant investment for Australians because it changes the probabilities for each of the four quadrants in your favour.
To see how, let’s take a look at the sort of environment that gives you each of the four quadrants…
Bigger gains, less volatility, better probability
In a crisis, Quadrant 2 is more likely to occur…
The Aussie dollar tumbles as investors flee the risky asset. The gold price surges because gold is considered a safe haven. And you could make money on both moves. Your gold is worth more in US dollars, and even more in Aussie dollars.
Compare this to what happens to an American gold investor in a crisis. Their dollar currency is a safe haven. The US dollar surges during a crisis. This decreases the benefit of owning gold, as it cancels out some or all of the gains foreign investors benefit from.
Usually, gold surges faster than the US dollar, making gold a good crisis hedge for Americans too. But far less beneficial than for Australians.
What about the other three remaining quadrants?
These are less important to gold investors, as it’s during a crisis that gold really shines. That’s why people own it. But they’re still important.
Quadrant 3 is the only quadrant where you will definitely lose money. The gold price moves against you, as does the exchange rate. But the environment which would make this happen is very unlikely to occur.
The Aussie dollar would have to rally while the gold price falls. This implies deflation during a ‘risk on’ investment cycle. That probably hasn’t happened for a sustained period since the Industrial Revolution. The gold price is influenced by inflation, which tends to go along with economic growth. And economic growth is good for risky investment assets, like the Aussie dollar.
To be clear though, such a move could happen in the short-term, as both gold and the Aussie dollar are volatile.
Quadrant 1 and 4 don’t offer a clear outcome. Your gains in the currency will offset your losses in gold, or vice versa, to some extent. You might lose or make money as gold or the exchange rate outpace each other.
The point is that your investment is naturally held stable by the different directions of the currency and gold. Your gold investment experiences less price volatility than an American’s, for example. That’s great for an asset which is waiting for a crisis to show its metal.
Historically, we’ve tended to be in these two quadrants, where the price of gold and the Aussie dollar are positively correlated, i.e. they move together and balance out each other’s volatility. Nothing much happens. Until that crisis comes along.
So now you know the four quadrants — the four possible outcomes for Aussie gold investors.
In short, the gold price for Australian investors is supercharged by the exchange rate during a crisis, held stable by exchange rates the rest of the time, and the double-whammy of the gold price and exchange rates moving against you is very unlikely to happen for a sustained period of time.
Meanwhile, US gold investors see their crisis gains reduced by currency moves.
The proof is in the pudding..
Take a look at the chart below. The gold price in US dollars has tumbled since 2013. But the fall in the Aussie dollar has kept the Aussie dollar gold price going from strength to strength:
Source: Sydney Morning Herald
I bought some gold in 2010.
In US dollar terms, I’m barely breaking even.
But in Aussie dollar terms I’ve made about 30%.
You should thank your lucky Southern Cross for the privileged position you’re in as an Aussie gold investor. I do.
With the currency winds firmly in your favour, and the long-term case for gold laid out in Jim’s book, there’s one last thing to cover…
The three Aussie-specific ways you could leverage the run up to $10,000 for maximum potential gains!
But in order to find those out, I suggest you take up this amazing book offer right here.
That’s fair, right?
Until next time,
for The Daily Reckoning Australia