An example that is instructive to look at is a gold purchase that is financed with equal amounts of euro, yen, pounds and USD. Following the logic from our first discussion piece (How to think about the gold price in currency terms) we show that the price change for gold financed in the four currencies can be calculated as follows:
Gold/(USD,EUR,YEN,GBP) % Chg = GOLD/USD % Chg – 25%×EUR/USD % Chg – 25%×YEN/USD % Chg – 25%×GBP/USD % Chg
GOLD/USD = USD per Oz; EURUSD = USD per EUR; YEN/USD = USD per YEN; GBP/USD = USD per GBP
By increasing the number of financing currencies, the change in the gold price becomes a function of factors that drive the relative value of each of these currencies as well as factors that impact the relative value of gold. And to the extent that these various risk factors impact the currencies in different ways (i.e. they are not perfectly correlated), the combination of the four currencies achieves a diversification benefit that dampens down the impact of any individual financing currency on the overall gold price.
In summary we believe there are benefits for the medium to long-term gold investor to increase the number of financing currencies used for gold purchases. When an investor buys gold they are explicitly expressing a currency view and to the extent they do not have a strong directional view on the currency it would make sense for them to seek ways to reduce concentrated currency risk and gain “purer” exposure to gold. This can be readily achieved by increasing the number of financing currencies which provides a diversification benefit against the specific risks that drive each individual financing currency. In our next commentary we will look at the impact on the long term performance of gold when purchased using a basket of currencies.
Treesdale Partners, portfolio manager of the AdvisorShares Gartman Gold/Euro ETF (GEUR), AdvisorShares Gartman Gold/British Pound ETF (GGBP), AdvisorShares Gartman Gold/Yen ETF (GYEN) and AdvisorShares International Gold ETF (GLDE), share their thoughts about the gold space.