I don’t know if this is the case in other countries, but here in Australia
the TV news and other media report the USD gold price, not the AUD price. The
result is that often gold will only appear in the local news when
the USD price does something interesting or achieves new lows or highs,
when for local investors the gold price may not have changed much or moved in
an opposite direction.
The reporting of USD prices also means some Australian investors can get
confused when they ring up to buy or sell and get quoted an AUD price
and say a) “that’s not what it said on TV” or b) “that hasn’t gone up/down
much since I last bought it”. While we do mention it to new investors, most
forget about the impact of the Australian/US exchange rate on the AUD price
of gold. This is best illustrated in the table below which shows and example
of a perfect investor who bought the USD low and sold the high.
|
USD
|
Exchange Rate
|
AUD
|
|
24 Oct 2008
|
$ 725.70
|
0.6528
|
$1,111.67
|
|
6 Sep 2011
|
$1,913.18
|
1.0527
|
$1,817.40
|
|
Increase
|
164%
|
61%
|
63%
|
For the American perfect investor they made a 164% profit but the
Australian perfect investor (buying when the USD price bottomed and
selling when the USD price topped) only made 63%. The reason is that the
exchange rate increased 61% over that time period. You can see the
interaction of the USD gold price and the AUD/USD exchange rate in the chart
below, with our perfect investor buy and sell points marked 1 and 2
respectively.
If the exchange rate had stayed at 0.6528 the Australian investor would
have sold at AUD 2,930.73 (a 164% profit). In this case the appreciating
exchange rate cost the investor $1,113.33. Ouch. It is why we tell Australian
investors about this rule of thumb: if the exchange rate goes up, the AUD
price goes down (assuming a constant USD price) and vice versa.
So when you buy in Australian dollars (or any non-USD currency), you
really have to forecast what the USD price is going to do and then what your
exchange rate is going to do, and consider the interaction of the two. One
way to get a handle on this is to turn the graph above into a scatter graph,
which I have done below.
This type of graph doesn’t show time so well (I’ve marked the perfect buy
point 1 and sell point 2 for reference), just the relationship between two
factors. I have also put in coloured “contour” lines which indicate the
points where the AUD gold price is the same across various combinations of
USD price and exchange rate.
The really useful thing about this chart is that you can see that the AUD
price has a tendency to move diagonally from left to right, following the
contour lines. This means that there were periods where the AUD price was
trending sideways or showing little change/volatility in its price – in other
words, changes in the USD price were counteracted by changes in the exchange
rate.
You can also use the chart to see what AUD price you get from various
combinations of future USD gold and exchange rate figures. On the chart above
it doing this is difficult because it covers such a wide range of different
prices and rates. The chart below shows the combination of some more
realistic medium term future USD prices and rates.
The white star is about where we are now, USD 1090 and a 0.74 exchange
rate, which equals AUD 1473. The arrows represent various potential futures:
- Green – Australian dollar weakens and gold bottoms and
strengthens, in which case AUD gold would be above $1600
- Blue- Australian dollar weakens and gold continues to
fall, in which case AUD gold would be in the high $1400s
- Yellow – Australian dollar strengthens and gold bottoms
and strengthens, in which case AUD gold would be in the high $1400s
- Red – Australian dollar strengthens and gold continues
to fall, in which case AUD gold would be in the mid $1300s
The general consensus on the Australian dollar is that it will continue to
weaken due to a poor economic outlook with commodity prices falling. As to
the direction of the USD gold price, I think that is hard to call right now
as we are in uncharted territory but the sentiment is negative.
What I would note is that there is a reasonable probability that the USD
gold price and the exchange rate will continue to move together for the
foreseeable future, as both do seem to be affected by the strength of the US
dollar. In that case an investment in AUD gold may represent a reasonable bet
as it is a case of a falling price (red arrow) scenario versus two neutral
(blue and yellow arrow) and one positive (green arrow) scenarios. Of course I
will probably be forced to eat my hat now that I’ve made that statement, but
hopefully the charts above give Australian investors some help with
making their precious metal investment decision.
