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Currency Hedging

16 December 2020

Gold acts as a natural currency hedge for the Australian investor. This is because a fall in the Australian dollar exchange rate will increase Australian gold prices as gold is priced in US dollars.
The mining boom saw the Australian dollar rise substantially, with the local currency at one-point trading well above parity with the USD back in 2011. This is captured in the chart below, which plots the value of the Australian dollar exchange rate against the US dollar since it was floated.



While the AUD has fallen since its peak in 2011, further weakness is possible with the RBA determined to maintain low interest rates and consider quantitative easing as they attempt to get the Australian economy and inflation back on target.
The potential for gold prices to rise in USD terms combined with the likelihood of a lower AUD make physical gold a compelling investment.
Just as importantly, from a risk management perspective, gold provides portfolios with a natural foreign currency exposure, one that will arguably do a far better job balancing out their portfolio than international shares would. With overseas equity markets at all-time highs, and a high correlation to the local stock market, they may not provide the sort of diversification investors require. If you feel that the AUD is set to enter a period of decline, investing a portion of your investment portfolio in gold has the potential to generate good returns.