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How does gold work in Australian dollars​

16 November 2021

Tuesday 16 November 2021
  • Gold: Priced in Greenbacks bought with Australian dollars
  • The Gold Quadrants
  • Virtual Gold Conference this Thursday
Shae Russell
Shae Russell,
Group Communications Manager
Dear Investor,
If you find yourself on these pages chances are, you’ve either just started investing in precious metals…

…or you want too. But not you’re not sure where to begin. Maybe you’re too afraid to ask someone for help. Perhaps you’ve done some ‘Googlng’, only to get lost in the jargon.

That’s where I come in.

Each Tuesday, I set out to explain one concept in precious metals and my purpose is simple: help make you a better investor.

So far, we’ve covered buying bars or coins, why you should buy precious metals with international accreditations such as gold or silver certified by the London Bullion Market Association (LBMA) and why it’s important to buy ethically sourced gold and silver

Those are the buying basics.

Today, we’re going to look at another piece of the precious metal puzzle. One that almost always stumps new investors: currency moves in the gold price.

Gold: Priced in Greenbacks bought with Australian dollars

Like all commodities, precious metals are referred to in US dollar terms. This is because the US dollar is the benchmark pricing mechanism for global commodity prices. A less complicated way of saying that, is that commodities are ‘priced’ in US dollars.

The reason for this is, is the US dollar is the reserve currency of the world and the most liquid currency.

However precious metals may be ‘priced’ in US dollars, but odds are you’re buying them with your local currency. While the US dollar price of gold matters, for Australians the Australian dollar gold price matters even more.

Not only are Aussie investors ‘exposed’ (the amount of money you have in an asset) to the US dollar gold price, but you’re also up against changes in the Australian dollar/US dollar cross rate [AUDUSD], also known as currency price movements.

In other words, you need to be mindful of changes in both the US dollar gold price (spot gold) AND changes in the value of the Australian dollar, as both will impact the Australian dollar gold price.

That seems like a lot to watch. However, there is a simple way to understand how spot gold and our local currency impact your gold investments…

The Gold Quadrants

Getting to know currency movements and what they mean for your investments can feel daunting. The Australian dollar and spot gold have an asymmetric relationship, meaning there’s no neat correlation.

To help you understand how a change in spot gold would impact the price of gold in Australian dollars, let me introduce you to the ‘Gold Quadrants’.

This idea was first shown to me by Capital & Conflict editor and dear friend, Nick Hubble many years ago.

To date, I’m yet to find a simpler way of explaining the relationship between our currency and spot gold.

The Gold Quadrants

First things first, neither of the four quadrants produce a ‘bad’ outcome. They are merely there to show you what a price move in one asset means for the other.

In addition, there’s a lot of ‘dollar’ words today.

For the simplicity of reading, I’ll refer to the US dollar gold price as spot gold and the Australian dollar gold price as XAUAUD, and the Australian dollar [AUD]/US dollar [USD] exchange rate as AUDUSD.

Quadrant 1: Let’s say the Australian dollar increases in value against the US dollar, rising from 75 US cents to 77 US cents. This means the Australian dollar has strengthened against the US dollar. However, spot gold has also increased. When both spot gold and AUD rise together, it will often slow, or keep a lid on any increases in XAUAUD.

Quadrant 2: When you’re already holding gold, Quadrant 2 is like ‘turbo charging’ your gold investments. Rising spot gold with a falling AUD will often cause XAUAUD to increase rapidly. This is exactly what we witnessed last week, when XAUAUD jumped a massive 7.50% in seven days…

Quadrant 3: This quadrant can be your friend if you’re looking to buy gold. When the spot price falls and AUD rises, XAUAUD will often fall faster than spot gold. Providing an excellent opportunity to increase your gold holdings. Over the years I’ve used Quadrant 3 as my chance to increase my gold position.

Quadrant 4: Now, let’s revisit our earlier example. The AUD has fallen from 75 US cents to 73 US cents. This means the AUD price has weakened against the USD. In Quadrant 4, a falling AUD will cushion the blow of decreasing spot gold. Meaning, your XAUAUD investments don’t reduce in value as much as spot gold falls.

Understanding how currency movements impact the value of gold can take some time to understand. However, when you break it down into these quadrants, the price movements become less daunting.

If you have a precious metals topic you want me to cover, drop me a line here.

Virtual Gold Conference this Thursday

Don’t forget this week is the virtual Gold Conference. ABC Bullion is proud to sponsor the Virtual Gold Conference this Thursday 18th November, starting at 09.30am AEDT.

Once again, an incredible line up has been organised. Nick Frappell, Global General Manager of ABC Bullion is the first speaker for the day. Straight after Nick will be ABC Bullion’s good friend and legendary macro commentator Jim Rickards…though Jim probably needs little introduction in these pages!

Register now to secure your spot.
Until next time,
Shae Russell
Group Communications Manager,
For ABC Bullion