The case for a purer exposure to gold | BetaShares Insights

The case for a purer exposure to gold

BY Cameron Gleeson | 29 July 2020
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It’s no surprise that gold is surging right now, given escalating China/U.S. tensions, real yields at or below zero, and a weakening USD. On 28 July, the gold spot price reached a new all-time high of USD1,959 per ounce, eclipsing the levels set in 2011-12 on fears of QE induced inflation.

For a number of reasons, the rationale for holding gold in the current environment is compelling.

Globally, gold is priced in USD, not AUD. If you are an Australian investor seeking ‘purer’ exposure to a rising gold price, it is our view that currency hedging your gold exposure is the appropriate approach. This approach is supported by the positive historical relationship between the AUD and the USD gold price, and substantially removes the complexity of currency movements, which are notoriously difficult to predict, from the equation.

Gold as defensive ballast

Both gold and fixed income traditionally have been used to diversify an investment portfolio, due to their generally low or negative correlation with equities.

However, if you believe the U.S. Federal Reserve and the RBA will resist moving to a negative interest rate regime, then government bonds may become a less effective tool for equity diversification. As a result, gold’s appeal as an alternative safe haven asset may increase.

Low interest rates and USD weakness

In such a low rate environment the opportunity cost of holding gold is negligible. In addition, gold appeals as a store of value during periods of USD weakness.

As the chart below shows, the strongest moves in gold have tended to coincide with periods when the AUD has strengthened relative to the USD, including over the four months to 27 July 2020.

Chart 1: Gold Price (in USD) vs. AUD/USD Exchange Rate
With periods where AUD is generally appreciating shaded

Gold price in USD vs AUD-USD exchange rate

Source: Bloomberg. Past performance is not an indication of future performance.

Currency and gold mining companies

An alternative way of gaining exposure to gold is by investing in gold mining companies.

If you are considering exposure to gold through gold miners, stock price appreciation has also tended to coincide with periods of AUD strength, as shown in the chart below.

Chart 2: NYSE Arca Gold Miners Index (USD version) vs. AUD/USD Exchange Rate
With periods where AUD is generally appreciating shaded

NYSE Arca Gold Miners Index vs AUD-USD exchange rate

Source: Bloomberg. Past performance is not an indication of future performance.

How significant is currency risk?

The impact of exchange rate movements on returns can be significant.

Consider how an Australian investor in gold bullion or a portfolio of gold miners might have benefited from the strong rise in the USD gold price over the 3 months to 30 June 2020 when the AUD also strengthened.

The table below compares the returns for a currency-hedged and unhedged exposure.

3-month returns to 30 June 2020 Spot gold price NYSE Arca Gold Miners Index
Currency-hedged (USD return) 12.9% 55.8%
Unhedged (AUD return) 0.3% 38.5%

Source: Bloomberg. Return calculation period: 31 March 2020 – 30 June 2020. Past performance is not an indication of future performance. You may not be able to invest directly in the spot gold price and you cannot invest directly in an index. The figures do not take into account any fees and costs associated with any ETF that tracks these underlying prices/indices.

The comparative returns show that leaving your gold exposure unhedged can be costly.

This is not just a short-term phenomenon. It has been a been a relatively consistent outcome over the last 40 years and is particularly prevalent when gold is experiencing large price gains.

The table below shows the average movement in the AUD/USD rate in 12-month periods during which the USD gold price rose or fell by more than 10%.

12-month rolling periods between Jan 1980 – Jun 2020 Average movement in AUD/USD
Where USD gold price return >10% +5.92%
Where USD gold price return <-10% -5.63%

Source: Bloomberg. Past performance is not an indication of future performance.

Of course, the currency equation works both ways. In periods where the AUD is weakening, unhedged exposures would be expected to outperform hedged exposures.

How to gain exposure to gold

You can use ETFs to gain exposure to gold:

  • directly – through a gold ETF physically backed by gold bullion, or
  • indirectly – through an ETF that holds a globally diversified portfolio of gold miners.

History suggests that, for Australian investors, a bullish view on gold or gold miners may best be expressed by seeking to remove the effects of AUD/USD exchange rates, for example by investing in a currency-hedged ETF.

BetaShares Gold Bullion ETF – Currency Hedged (ASX: QAU)

    • Physically backed by gold bullion held in a segregated account with a third-party custodian – bullion bar list issued by JP Morgan is published on our website.
    • The only AUD-hedged gold ETF solution currently available in the Australian market – i.e. exposure to pure USD gold prices.
  • 1-year performance: 21.6% (to 30 June 2020)1.

BetaShares Global Gold Miners ETF – Currency Hedged (ASX: MNRS)

  • AUD-hedged exposure to the world’s 46 largest gold mining companies (ex-Australia).
  • Diversification away from concentrated Australian gold mining sector which makes up only 10% of the global gold mining market.
  • 1-year performance: 58.9% (to 30 June 2020)2.

There are risks associated with an investment in the BetaShares Funds including market risk, gold price risk and currency hedging risk (for QAU); and market risk, emerging markets risk, gold mining company risk and concentration risk (for MNRS). For more information on risks and other features of each BetaShares Fund, please see the applicable Product Disclosure Statement, available at www.betashares.com.au.


1. Past performance is not indicative of future performance.
2. Past performance is not indicative of future performance.

1 Comment

  1. Ray Gresham  |  July 31, 2020

    This is a really interesting article. Would I be able to have someone contact me to talk further about this please.

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