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Gold prices have risen to more than USD 1,950 per troy ounce (oz) in early March as the conflict in Ukraine, heightened inflationary concerns, and slowing economic growth combine to reignite demand for the trusted safe haven.
These events have seen a return to inflows for global gold ETFs, with holdings increasing by just over 2% in the first two months of the year (after falling by 5% in 2021). Concurrently, speculators in the gold futures market have more than doubled their net long position (i.e. positions that will profit if the gold price rises).
Performance wise, the precious metal (priced in US dollars) has now outperformed US equities by approximately 20% since the start of the year (data to March 11). This can be seen in the chart below.
The chart highlights that what we’ve seen so far in 2022 is another example of gold providing portfolio protection when it’s needed most.
Local investors have also benefitted from gold’s protective qualities. In Australian dollar terms, the YTD outperformance of gold relative to the local equity market is closer to 13%, with gold up by almost 8%.
The slight ‘underperformance’ of the Australian gold price compared to its US equivalent has led some to question whether it matters what currency you buy gold in, should you decide to include it in your portfolio.
Does it matter what currency you buy gold in?
Over the long-run, gold prices in many developed market countries have delivered relatively similar returns, with the difference between the US dollar gold price and the gold price in other currencies often explained by a combination of inflation and interest rate differentials.
The similarities can be seen in the table below which shows the average annual returns for gold across a range of currencies from the year 2000 to the end of February this year.
The following table, looking at the same currencies, highlights these differences.
Currency impacts magnify protective benefit of gold for Australian investors
When buying gold unhedged in Australian dollars, investors are taking on an additional source of risk and return. They are not only exposed to movements in the US dollar gold price, but also movements in the AUDUSD exchange rate.
Rather than proving problematic, this additional source of risk and return has historically been beneficial for Australian investors looking to hedge equity market risk with a gold allocation, because the Australian dollar typically falls against the US dollar when equity markets fall.
Indeed, since the turn of the century, the Australian dollar has fallen against the US dollar 60% of the time the local equity market has seen a monthly decline. The average decline for the Australian dollar in the months the currency fell alongside the equity market was 3.5%.
In the 40% of times the Australian dollar rose against the US dollar while local equity markets sold off (as it has in 2022 so far), its average increase was just 2.6%.
Over this entire period, this exchange currency effect has been worth almost 1.2% in terms of the enhanced portfolio protection Australian investors would have received in the months that equities declined, assuming they held a gold position unhedged in Australian dollars.
To find out more information from The Perth Mint on the benefits of holding gold in Australian dollars, please click below to download the report.
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