Gold prices rose to $1,950 per troy ounce in early March 2022 due to Russia’s invasion of Ukraine. The rise in Australian prices was further supported by concerns about rising inflation and sluggish economic growth. A combination of these factors has changed the need for reliable safe-havens. In terms of performance, gold has now outperformed US stocks by around 20% at the start of the year. In Australia, local investors are also benefiting from the protective properties of gold.
In Australian dollar terms, year-to-date gold has outperformed the local equity market by close to 13%, with gold at around 8%.
Does it matter what currency you buy gold in?
The slight “underperformance” of the gold price Australia compared to its US equivalent has led some people to question which currency is best for buying gold. Does it cost more when you buy in US dollars or Australian dollars?
Over the long term, gold prices have produced relatively similar returns in the markets of many developed countries, with the difference between the price of gold in US dollars and the price of gold in other currencies often being explained by a combination of inflation and interest rate differences.
While long-term returns and the role gold can play in a portfolio tend to be similar regardless of the currency you’re looking at, there are differences in short-term price movements and volatility.
When buying gold that is not hedged in Australian dollars, investors take on an additional source of risk and return. They are exposed not only to movements in the gold price in Australia but also to movements in the rate of exchange for AUD/USD.
Despite the fact that they might be a little problematic, the added risk and historical return have been beneficial to Australian investors seeking to protect themselves from equity market risks by buying gold, as the AU dollar typically falls against the US dollar when equity markets decline. In fact, since the beginning of the century, the Australian dollar has fallen 60% against the US dollar at a time when the local stock market has posted a monthly decline.
In a lot of cases, the Aus dollar has risen against the US dollar while local equity markets have sold off (like 2022 to date), and the average increase has been 2.6%.
Over this entire period, this currency effect represented approximately 1.2% in terms of the improved portfolio protection that Australian investors received in months when shares fell, provided they held gold.
Real estate bias
Most Australians have a home bias when it comes to their portfolio and overall asset pool. The level of domestic equity bias in Australian portfolios is among the highest in the world. This is only natural, given that most people regard owning their own home as an important asset. Additionally, people earn their income mostly in local dollars. Given this reality, the logic of holding unhedged gold in Aus dollars is even more compelling. If the Aus dollar appreciates, this is beneficial if you hold more assets valued in Australian dollars. However, if the Aus dollar weakens against the price of gold, Australia’s uncapped position will provide additional protection not just within the financial asset portfolio, but across the real estate, cash, and superannuation areas that most Australians expect to grow and protect.