If instead a foreign currency is used to make the gold purchase, the flow of funds is the same but the USD is substituted for foreign currency. Using the gold financed in Japanese yen example, this transaction can be broken down into the following components (i) borrowing yen, (ii) converting the yen into US dollars at the foreign exchange rate and then (iii) using the US dollar proceeds to purchase gold. The cash flows are as follows:
Another way in which an investor might describe this transaction is LONG GOLD / SHORT YEN. In other words by purchasing gold financed in yen, investors are in effect expressing the view that they expect the value of gold to increase relative to the value of the yen. The key feature to note in the cash flow diagram is that the USD cash flow from the gold purchase and the USD cash flow from the foreign exchange transaction net to zero and the investor only holds a long position in gold and a short position in the yen (with no USD exposure) – hence the transaction can be more simply described as “using yen to make gold purchases”.
The general point to highlight from this analysis then is that a gold purchase financed in US dollars is structurally similar to a gold purchase financed in yen but in the former the investor expresses the view that gold will rise in value relative the US dollar and in the latter that gold will rise in value relative to the yen.