AUSSIE AN FX OPTION FOR GOLD BULLS
BORIS SCHLOSSBERG
DIRECTOR OF CURRENCY RESEARCH, GFT
THIS week gold reached a record high, breaking the key $1,100 an ounce level after the central bank of India purchased 200 tonnes from the International Monetary Fund – the largest such transaction by a central bank in over 30 years.
Analysts’ opinions regarding this latest surge varies greatly, with some dismissing the action as mere currency management by Indian monetary authorities, with others seeing the rise in gold as part of the larger theme away from dollar-dependent reserves.
There is little doubt that gold is essentially a fear trade, driven by concerns over fiat currencies at a time when most of the G10 economies are running record fiscal deficits that will threaten their balance sheet positions for years to come.
The recent rise has been helped tremendously by the lower interest rate environment in the G10 universe, which has made carrying costs for the yellow metal much more palatable for long-term investors.
I believe gold is a buy, as long as it remains above the $1,000 an ounce level, but those investors who would like to express a bullish view on the precious metal may want to consider the Australian dollar as a possible FX alternative. Along with Canada, Australia is one of the top five producers of gold in the industrialised world. However, unlike the loonie (the Canadian dollar), which only yields 25 basis points, the Aussie carries a 3.5 per cent yield – the highest in the G10.
The Australian dollar-US dollar pair has not had any serious correlation with the price of gold for several years, trading primarily on risk assumption and risk aversion flows. However, that situation could change rapidly if the rally in gold accelerates and attracting further attention to the trade. In the near term, the Australian dollar may face some profit-taking pressure if this Thursday’s unemployment data registers an increase in joblessness after last month’s massive gain of 40,000 jobs.
The Aussie could recede from its 2009 highs as traders price in a pause from the RBA. Ultimately however, if gold climbs higher, then the Aussie should follow suit and currency traders could enjoy the dual benefit of high yield and further capital appreciation as the pair targets parity.
Boris Schlossberg and Kathy Lien are directors of currency research at GFT. Read their commentary at www.GFTUK.com/commentary or e-mail them at [email protected].