There have been several blogposts on the merits of buying currency hedged ETFs for foreign equity exposure versus unhedged exposure.   The arguments against unhedged ETFs are weak and often false, like “the companies hedge their currency exposure already”. European companies are perhaps hedging their business exposure but they are not certainly hedging your personal investment in their stock.

Bond market participants have long figured this out. Ask any bond trader how they think about FX risk in foreign bonds.   They will tell you that they fund their foreign bond purchases in the repo or other financing markets in that respective currency.

Another illustration, let’s say an American wanted to buy a house in Holland because he thought it was a good investment.   That house cost 100,000 Euro.   After 2 years he realized he made a great investment and the house appreciated 25% to 125,000 Euro so he sells it to realize his profit.

When he converts 125,000 Euro back to USD, the exchange rate goes against him by 25% to 0.80 where some economists are predicting where the Euro will trade to.   So 125,000 Euro is converted to $100,000 producing zero profit.

With respect to gold, we have always argued that it is more like a currency and should be funded in the currency of your choice. Gold in the US is the same as gold in Europe or Japan.

Accordingly, with respect to investing in gold, choosing the funding currency is equally as important as investing in gold itself.

This article was written by Treesdale Partners, portfolio manager of the AdvisorShares Gartman Gold/Euro ETF (GEUR) and AdvisorShares Gartman Gold/Yen ETF (GYEN).