Source: Bloomberg LP; Treesdale Partners calculations; Gold Basket represents an equally weighted basket of Gold/USD, Gold/Euro, Gold/Yen and Gold/Pound with daily rebalancing; past performance is not indicative of future performance
This week we present a brief review of the performance of gold priced in euro, yen and pound terms, year-to-date and over the last 3 years. The first striking feature about the performance of these gold prices is the wide variation in performance depending on the financing currency used to make the gold purchase. Gold financed with euro year-to-date has returned 9.6% while at the other end of the performance spectrum gold priced in dollars has returned 1.8% with a marginally higher standard deviation. The next best performer year-to-date has been gold financed in yen returning 5.0%.
Interestingly gold priced in yen has experienced the best one, two and three year performance of all the gold prices returning 1.7% annualized compared to the -9.1% annualized performance of gold priced in dollars.
The single biggest factor driving the divergence in performance has been the relative weaknesses of the respective financing currencies on the currency markets. Of note over the last three years the yen has weakened by 30% versus the dollar. When an investor buys gold financed in yen they are expressing the view that they expect the price of gold to increase in terms of the number of yen for which it can be exchanged at a future date.
An investor that buys gold in yen is therefore expressing a directional view on both gold and the yen – they are expressing the view that as the yen weakens on currency markets they would expect, all things being equal, to receive more yen for a given amount of gold. Similarly as the yen strengthens they would expect to receive fewer yen for a given amount of gold. In market speak they are said to be long gold, short yen. And it is this short exposure to the yen from holding gold in yen terms that has driven its outperformance relative to the other “non-dollar” gold prices.
Looking forward, should the trend of increasing divergence between monetary policy in the US versus monetary policy in the Eurozone and Japan persist, this would be expected to cause further weakness in their respective currencies versus the dollar and lead to further rises in gold priced in both euro and yen terms. Of most concern to investors holding gold in dollars however, should be the potential for the dollar to strengthen on currency markets as the market factors in the chances of higher interest rates in the US relative to interest rates of the other major economies.
With the value of the dollar a key factor underpinning the price of gold, under conditions of broad based strength in the dollar the price of gold in dollar terms would be likely to be adversely affected. As such for investors that wish to continue to hold gold for its diversification benefits but are concerned about potential future strength in the dollar, we would recommend a strategy of changing the financing currency of gold holdings from dollars to foreign currencies such as the euro or yen where there is potential for further easing in monetary policy relative to the US, which might then act to weaken these currencies.
This article was written by 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).