Buying Gold: Hedged Vs. Unhedged & Currency Risk
This guide is part of our comprehensive guide on How To Buy Gold In Australia. We’d recommend checking the guide out in full to better understand gold investments.
Gold trades in US dollars. Gold prices are most frequently quoted in US dollars. Australians should be aware that when buying or selling gold there is currency risk involved from changes in the AUD/USD exchange rate. Protecting yourself from the risk of adverse price movements is called ‘hedging’.
Drew Corbett from BetaShares, one of Australia’s largest ETF providers, Corbett states just how big the impact of currency fluctuations can be on gold returns.
“A lot of Australians need to realise that the AUD currency fluctuation can impact their gold returns. In actual fact in the last 2 years whilst gold has rallied 74%, returns have only been 14% because the Aussie dollar has rallied so much. So investors should look at whether they want an A$ hedged solution which removes the risk and just gives them the pure gold return or whether they want the other solution.”[i]
Understanding Currency Risk When Investing In Gold
Let’s examine why currency risk exists for gold investors in countries outside the US. First let’s think of gold as another currency (as it once was). Gold can only really be bought in USD. For an Australian investor who holds AUD they need to.
- Sell AUD, buy USD
- Sell USD, buy gold
Now let’s assume that an Australian investor is looking to purchase gold and that the price of gold in USD remains unchanged however the AUD/USD rate does change.
If the AUD rises it becomes cheaper to buy USD and indirectly cheaper to buy gold. Gold becomes worth less than before in AUD.
If the AUD falls it becomes more expensive to buy USD and indirectly more expensive to buy gold. Gold becomes worth more than before in AUD.
Is it better to be unhedged or hedged?
If you are considering gold as an investment and you believe the Australian dollar will rise then you will want to hedge against those AUD rises.
If you alternatively believe the AUD will fall then the value of gold holdings will rise and you would lose out those benefits from a hedge.
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[i] Going For Gold, David Corbitt Interview On CNBC, August 11th 2011