Gold and its correlation to the AUD/ USD
In the past couple of months, we’ve watched the price of gold rise and have heard experts praise the precious metal. You may have heard talk about interest rates – it seems like that is all economists can talk about. But little is being said about currencies. How does this affect Australian investors?
Simply put: a strong dollar weakens the gains that gold makes but a weaker US dollar makes the gains that gold makes stronger.
For Australians, it is important to keep a close eye on how strong the US dollar is against the Australian dollar. Investors put money in safe-haven like gold because gold generally maintains its intrinsic value in times of turmoil. So, when there is economic trouble, or any turmoil in the world that affect the strength of the US dollar, gold comes up tops. The opposite happens when the economy picks up and things generally look better.
What about the US dollar and the price of gold in Australia?
Australia is one of the three biggest producers of gold in the world. So the gold price Australia is a big deal. Historically, the correlation between gold and the AUD/USD has been over 80% to the gold price Australia. When the price of gold goes up, the AUD/USD rate goes up vise versa. This is not the same for other countries and their currencies. Take Switzerland and it’s currency for instance:
Switzerland is one of the countries with the strongest economies but for their currency, the Swiss franc is pegged to the USD and consequently directly correlates with the price of gold. So, for the Swiss, when the franc rises so does the price of gold. This means the Swiss franc has a negative correlation to the gold price. It is important to note that most currencies do not behave the same way as the Swiss franc when it comes to gold.
So, what does this all mean for anyone wanting to buy or sell gold in Australia?
Like most major currencies, the Australian dollar is moved by factors like economic growth, politics, interest rates, economic speculations, etc. Since economic growth is linked to a country’s domestic industry and with Australia being the second largest producer of gold, the gold price Australia will go up when the global demand for gold increases. But then again the fact that the US dollar is the default trading currency means that it is important for anyone wanting to buy or sell gold to keep tabs on the USD/AUD movements.
If you are thinking of selling your gold in Australia, you should watch the gold price and work out the AUD/USD exchange rate. Keep in mind that the strength of the Australian dollar is decided by futures traders located in some other continent. Look at what the U.S and Australian central banks are doing with their rates.
If for instance, the Reserve Bank of Australia (RBA) continues to lower interest rates but the US fed doesn’t, the Australian dollar will be seen to be weakening against the greenback. When gold is sold the transaction will usually be settled US dollars because that’s the global accepted currency. A strong US dollar and a weak Australian dollar means that your gold will be worth more in Australian terms. The opposite is true: a strong Australian dollar signals a weakening of the US greenback.