With the first half of 2018 now drawn to a close, much of the financial
medias’ headlines and commentary relating to the gold market has been
focusing on the fact that the US dollar gold price has moved lower
year-to-date. Specifically, from a US dollar price of $1302.50 at close on 31
December 2017, the price of gold in US dollar terms has slipped by
approximately 3.8% over the last six months to around $1252.50, a drop of US
$50.
Since the world’s major gold price discovery hubs of London and New York
trade gold in US dollars (or more correctly predominantly trade synthetic
gold and derivatives), and since much of the mainstream financial media tends
to be very US-centric, the media’s fixation with the US dollar price of gold
is probably not surprising. However, it’s not the full story, because in some
major national currencies as well as in cryptocurrencies, the price of gold
has actually moved higher year-to-date.
From the perspective of an investment bank forex trading desk,
where gold is traded as a currency in ‘pairs trades’ against a set of
major fiat currencies, the varied movements of gold prices across a range of
currencies will not be surprising. Currency prices (including the price of
gold) are constantly moving against one another, creating these exchange
rates. What’s important to these forex traders is the ‘relative strength‘
of currencies and of gold (and increasingly of cryptocurrencies).
Since the US dollar has had a relatively strong performance year-to-date
2018 against many other fiat currencies, this means on the flip side that
many national currencies have weakened vis-a-vis the US dollar. By
definition, this also means that the gold price performance year-to-date,
measured in any currency which has weakened more in percentage terms against
the US dollar than the US dollar gold price has weakened, will actually now be
higher in those currencies.
For those with a base currency other than US dollars, or whose wealth or
earning power is denominated in currencies other than US dollars, it’s
important to keep track of the relative strength / weakness of one’s base
currency, and at the same time look beyond the financial media’s headlines,
and keep an eye on the gold price in that base currency / home currency.
Brazilian Real
Let’s look at some examples. Some of the worst relative performances of
fiat currencies over the first 6 months of this year have been the Brazilian
Real, the Swedish Krona, the Russian Rouble, the South African Rand, and the
Indian Rupee, i.e. a mix of developed and emerging market currencies, and a
mix of commodity and non-commodity currencies.
Given the very strong performances of cryptocurrencies late last year
(especially in December 2017), and their subsequent price reversals
since January, the gold price when measured in cryptocurrencies, such as
Bitcoin, is also higher over the first half of 2018.
Year-to-date, the Brazilian Real (BRL) has lost more than 17% of its value
against the US dollar. However, over the same time, the price of gold in
Brazilian Real has gone up by more than 12.5%, rising from BRL 4315
per troy ounce at the start of January to BRL 4858 per ounce
at the end of June.
The explanation for this is as follows. At the start of 2018, the US
dollar gold price was trading at US $1302.50 per troy ounce, which at the USD
/ BRL exchange rate of USD 1 = BRL 3.31 at that time translated into BRL 4315
per troy ounce of gold. Fast forward six months and the US dollar gold price
ended June $50 lower at US$ 1252.50 per ounce.
Gold
Price in Brazilian Real, January – June 2018, Source
Over the same 6 month time period, the Brazilian Real weakened
against the US dollar, falling from 1 dollar = BRL 3.31 at the start of January
to 1 dollar = BRL 3.88 at the end of June. In Brazilian Real terms,
that end of June gold price of US$ 1252.50 per ounce price now
translates into BRL 4858 (1252.5 * 3.88). In this case,
the rise in the local currency (BRL) price of gold is attributable to the
fall in the value of the Brazilian Real. This is a classic example of the
gold price adjusting to reflect the weakness in a local currency.
Brazilian
Real per US Dollar, January – June 2018. Source
Swedish Krona
Taking another example, year-to-date, the Swedish Krona has also had a
relatively poor performance, falling by more than 11.5% against the US dollar
over the first 6 months of 2018. However, during the same time period, the
gold price in Swedish Krona has rallied strongly from SEK 10685 per
troy ounce to approximately SEK 11210 per troy ounce.
Gold
Price in Swedish Krona, H1 2018. Source
Again, even though the US dollar gold price fell from US$ 1302.50 to US$
1252.50 during the first half of 2018, the SEK gold price has risen. Why?
Because the Swedish Krona has weakened from 1 USD = SEK 8.023 at the start of
January to 1 USD = SEK 8.950 at the end of June, meaning that the US$ 1252.50
gold price now translates into SEK 11,210 (1252.50 * 8.95).
Swedish
Krona per US Dollar, January – June 2018
Russian Rouble
During the year-to-date to end of June 2018, the gold price in Russian
Rouble (RUB) has risen from RUB 75110 per troy ounce to RUB
78690, an increase of approximately 4.75%. Over this time, the value
of the Rouble has fallen from approximately 1 USD = 57.7 RUB at the start of
January to 1 USD = 62.8. Again this means that even though the US
dollar price of gold has ebbed from US$ 1302.5 to US$ 1252.2 over the first 6
months of 2018, the RUB value of an ounce of gold has increased on the back
of the depreciating RUB exchange rate (1302.50 * 62.8).
Gold
Price in Russian Rouble, H1 2018. Source
Indian Rupee
The story is similar in Indian Rupee. Over the year-to-date 2018, the gold
price in Indian Rupee (INR) has risen 3.19% in local currency terms, from INR
83130 per troy ounce to approximately INR 85780 per troy
ounce. In this case, over the first half of 2018, the US dollar strengthened
from 1 USD = 63.85 INR to 1 USD = 68.45, with the higher Rupee gold price
reflecting the US dollar gold price of 1252.50 translated into Rupee at a
68.45 to 1 exchange rate.
Gold
Price in Swedish Krona, H1 2018. Source
Bitcoin
The upward price movements of the gold price denominated in Bitcoin are
even more startling. From an opening price of approximately US$ 14,110 on 1st
January 2018, the price of Bitcoin in US dollars fell dramatically over the
first 6 months of the year, to around US$ 6400,
i.e. a 55% drop in 6 months.
Gold
Price in Bitcoin, January – June 2018. Source
However, the gold price denominated in Bitcoin more than doubled over the
same time frame, rising from 0.09 to 0.20 for the year-to-date. This would
mean, for example, that had you traded out of Bitcoin and into gold at
the start of 2018, your Bitcoin at that time would have had more than twice
as much purchasing power in terms of purchasing gold as it had at the end of
June.
A Better Way of Thinking
Given the constant fluctuations in fiat currencies, fixating on the gold
price in US dollars, or indeed in any fiat currency, may not be the best way
to think about your gold holdings. After all, many savers and investors in
physical gold move their wealth and investments into physical gold precisely
because it is not linked to fiat currencies and is a gateway out of
government induced financial
repression.
Remember that physical gold has no
counterparty risk, and is not issued by any central bank, government or
monetary authority. Physical gold is a mined tangible asset with inherent
value and a limited supply.
A better way to think about an investment or holding in gold is perhaps by
how much of it you hold. For example, I if had US$ 13,000, which I used to
buy ten
1 troy ounce gold Maple Leaf coins, whatever then happens with the
gyrations of fiat currencies, I still have those 10 gold maple Leafs and I
can think of my holdings of physical gold as 10 gold Maple Leafs, weighing a
combined 10 troy ounces.
The
US Dollar has lost more than 98% of its value since 1913, while gold has
retained its value.
Savers and investors move into physical gold precisely because it’s a
monetary store of value that maintains its purchasing power over time and as
such offers an exit from the debasement of fiat currencies such as the US
dollar. Buying physical gold and then constantly trying to value it in terms
of a fiat base currency is in some ways illogical. Surely a more logical
approach is to say, I had x amount of dollars, but now I own X ounces of
gold.
The same applies to gold’s role as a safe haven and as a form of
financial insurance, i.e. physical gold is a form of wealth preservation in
times of monetary and economic crisis. People make an allocation and use the
safe harbor of physical gold precisely because it is ring-fenced from the
turmoil of fiat currencies and associated central bank and government
meddling. Again, surely a better way of thinking would be to say, I had x
amount of fiat currency, I used this to buy gold, and now I have X ounces or
X kilograms of gold. At a minimum, thinking in this way is a liberation from
the constant barrage of mainstream media commentary about the US dollar gold
price.
Ronan Manly
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