Dr. Alex Cowie at
Money Morning has a piece on gold noting that while
gold has been range bound recently,
“during its 12 year bull-run, gold has often made its next move up after it has ‘done some work’ in a particular price range for a while.”
What is more interesting for Australian investors is the discussion of
the impact of the AUD/USD foreign exchange (FX)
rate on the Australian gold price.
In our Depository business we have
often seen Australian investors fail to consider the impact of our FX rate on the local gold price,
which is (assuming USD gold stable):
• FX rate rises,
Australian gold price
• FX rate falls, Australian gold price up
This sometimes results
in clients calling up to sell
after a rise in the USD
gold price and expecting
a profit, but then find we are quoting an AUD gold price lower than
their purchase price – all because the effect of the FX rate rising since they bought
being greater than the increase in the USD
A good example of the effect of FX rates was in 2008. Consider the four month period illustrated in the table below.
Whilst US based
investors experienced a loss, gold was positive for Australian investors. Dr. Cowie gives a long term example of this effect, noting that “the Aussie dollar gold price has
gone up an average of just 11.0% per year for the
last ten years – compared to the US dollar gold price,
which has gone up an average of 17.2% per year.”
However, he sees a good opportunity coming up, with the Aussie dollar having “now dropped from
$1.08 to $1.02 in just a few months.
The Reserve Bank of Australia’s 50 basis
point interest rate cut
last week has really taken the wind out of the Aussie. Judging by the down-leg in previous interest rate cycles – not to mention the state of
the Australian economy
– more cuts are coming.
Which should mean the Aussie may have further to fall yet.”
If that fall
in the Australian FX rate coincides
with an increasing USD
gold price (as some analysts expect), then “Australian gold investors are looking at a very good opportunity to buy gold.”
So as an Australian investor you have to consider not just what the USD gold price will do, but also what the Australian dollar will do relative to the US dollar.
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PRO MARKET FEEDBACK
Some feedback from professionals in the gold market
as reported by Reuters.
SILLY YELLOW TRINKETS
John Mauldin on gold as “insurance”.
INDIAN GOLD TAX SCRAPPED
Wall Street Journal reports that India has “removed the
excise tax on sales of all