Gold as currency hedging

Investors considering gold sometimes wonder about currency hedging. As gold trades in US dollars, Australians who buy it make a twofold bet.

Investors considering gold sometimes wonder about currency hedging. As gold trades in US dollars, Australians who buy it make a twofold bet:

1. That the gold price will rise.
2. That the US dollar will rise or stay broadly the same vis-à-vis the Aussie dollar.

While the first of these bets is self-evident, the second can give investors cause for pause. Investors might ask: can exchange rate movements undermine gold’s role in my portfolio? When the US dollar is at record highs or lows, am I better off in hedged or unhedged gold? What are the strengths and weaknesses of each approach?

This white paper answers these questions. In doing so, the white paper lays out the three main ways gold gets used: diversification, crisis hedging, and tactical trading. We then examine the effects of currency hedging on each.