We are often asked how US based investors can construct a long position in gold that is financed in a foreign. In the discussion below we show the components of trade that gives an investor long exposure to gold that is financed with European euro. A useful way to understand how the portfolio would be constructed is to look at the cash flows associated with a gold transaction. Looking first at a gold transaction that is funded in dollars we show a diagram of the associated cash flows.
In a regular gold transaction the investor receives one unit of gold (+1) and pays one unit of dollars (-1). For a gold transaction financed in euro we must replicate the above cash flow but substituting euro for dollars. This is done by combining a gold purchase in dollars with an FX transaction where the investor sells euro and buys dollars. These cash flows are shown in the diagram below:
