Golden Times Depending Which Currency You Use…

Introduction

The old narrative I often hear say is: get into gold in times of inflation and economic stress. Quite often I get into a debate challenging this notion: I would stress that what is more important, in terms of your overall performance, is in which currency you hold the yellow metal.

It’s all about the currency

Since 2000-2022, the average USD return has been 9.2%, in GBP 10.7% and 11.9% in INR. Since 2000, gold has only seen six negative years in USD terms, and just four in GBP terms.

Tom Pelc, MSTA CFTe

Tom is Chief Investment Officer at Fortu Wealth which offers Private digital modern banking for family wealth and Ultra High Net Worth (UHNW) individuals and Founder of Pelc Enterprises Ltd. In the past Tom has worked as Managing Director at Nomura International plc as Co-Head of Macro Technical Strategy, RBS as Head of Macro Technical Strategy, Othon investment (Hedge Fund), as Portfolio Manager and trader, Merrill Lynch and the Standard and Poors Group of Companies.

• When people typically talk about gold it’s in USD terms and we all know in the business that USD strength or weakness has a bearing on commodity prices, typically a weaker USD is supportive for gold as a crude generalisation. Remember gold is an asset that has an intrinsic value. The value changes over time and can have periods of heightened volatility. As a rule, when the value of the dollar increases relative to other currencies worldwide, the price of gold tends to fall in USD terms.

• It is because gold becomes more expensive in other currencies. As the price of any commodity moves higher, there tend to be fewer buyers; in other words, demand recedes. Conversely, as the value of the USD moves lower, gold tends to appreciate as it becomes cheaper in other currencies. Demand tends to increase at lower prices.

Gold does not yield interest in itself; therefore, it must compete with interestbearing assets for demand. In other words, other assets will command more demand because of their interest rate component.

We experienced a number of years of unusually low interest rates and yet gold has performed well making fresh all-time highs on 6 August 2020 at USD2,075.47. The move on 8 March 2022 got just a few dollars shy of retesting that level at USD2,074.44. While the USD gold price is a widely accepted benchmark, 95% of the world must translate the value of the yellow metal to their local exchange rates.

We can see in Figure 1 that technically the peaks in Gold in USD appeared around the 200% Fibonacci projection of the measured uptrend from 2016-19 marked at USD2,067.78, which has not been broken on a weekly close basis despite scouting parties above it, thus a key resistance hurdle going forwards. The move from 2016-2020 was + 97.49%.

But in very simplistic terms we can see in Figure 2 in GBP terms gold made all-time highs on 6 August 2020 at GBP1,578.67 per ounce, and then on 8 March 2022 made a new at GBP1,579.02. Using the same time frame to measure performance from 20162020, gold was up + 92.09%, thus underperforming by more than 5% in that time frame in USD terms.

In this example, GBP1,567.21 is the 1.618% Fibonacci projection resistance that has held on a weekly close basis tested three times since 2020, the obvious hurdle to close above to extend into future virgin territory, if that were to happen then you have a series of other Fibonacci projections to target.

Let’s take a look at Table 1:

12 December 2022 in different currencies

+6.25%

-6.92%

Obviously, some currencies have done better than other for various reasons whether it be commodity narratives, interest rate differentials, haven flows etc, their domestic economic status. For example, in 2022 until October the USD was a dominant currency in terms of its strength and the Japanese Yen had weakened a lot due to central bank policy (yield curve control), and interest rate differentials and carry trades.

So, if you have a bullish view not just on gold, but let’s say a stock index, which currency you use is important on relative performance. For example, the FTSE 100 has over 65% of companies getting their main income from overseas business so when the British pound weakens this can be supportive for the index.

Remember, in November 2022 alone the gold priced was more than +7% this was mainly on the back of USD weakness as a reaction to US economic data and markets recalibrating their Fed rate hike cycle forecasts and inflation expectations. The USD index in November had its worst monthly performance since 2009 and

Figure 3 shows how the USD index (DXY) peaked then has fallen since October this year. Remember the Index has a heavy weighting in EUR’s of 57.6% then JPY 13.62% etc.

But the key message to get across is that the gold price has mostly increased in major currencies over the last 20 years regardless of the individual specifics of each currency.

Table 2: Gold performance in major currencies, 2000-2022

This is important because if you have a bullish view on gold outright then you can see whatever major currency you might be holding it in means over the long term your performance would have been decent, but you have to put this it into context of other asset class performance. For example, in 2021 Bitcoin was +160% on the year and major stock markets were up around + 27.0%, so holding gold was not a great alternative last year. But over the medium to long term, we have continued to see gold hold up and we can look at some of the fundamentally driven factors supporting the gold price and may give clues to the future.

• Central Bank activity is important, accumulating gold in October 2022 Central Banks added a further net 31t of gold to international reserves (-41% m-o-m). This initial figure helped lift global official gold reserves to its highest level since November 1974 (36,782t).

• Trading activity and volumes, we can see in Table 3 below shows gold as a diversification asset class attracting interest, especially in 2022 when the 60/40 equity/bond model witnessed double-digit losses in both asset classes and the worst performance in 60/40 for many years.

German Bunds

US corporate bonds

UK Gilts

DOW Jones (all stocks)

Euro/Yen

U3 1-3 yr Treasuries

Gold**

Euro/Sterling

US T-Bills

S&P 500 (all stocks)

• Out of four possible outcomes for growth and inflation whether it be deflation, stagflation, reflation or Goldilocks gold historically has fared positively in all but the Goldilocks scenario. In a stagflation or deflationary environment outperformed US corporate and government bonds, the S&P500 index and S&P GSCI Index.

• Gold-backed ETFs and similar products account for an important segment of the gold market priced in USD with institutional and individual investors using them for their investment portfolios. The flows tend to signal short term and long-term views on the gold market. YTD global gold ETFs have seen USD2.4BN of net outflows, mainly US and Asia funds vs European net inflows as a safe haven theme with a deteriorating economic outlook in the region.

Conclusions

Looking at the bigger picture, gold over the last 50 years returned +4,084% (gross of costs since the end of 1971), has beaten the cost of living (582%) and all assets except US equities (18,529%), REITs (11,457%) and non-US stocks (6,561%) in USD terms. Since 2000, we have seen REITs lead (+1,024%) followed by gold (525%), US equities (391%), corporate bonds (254%) and then housing (175%). Note in the past 5/7 US recessions, gold has produced positive returns.

Bottom line: it is worth having some gold as part of a diversified portfolio whatever the currency you hold it in. Even better is to hold it in physical gold coin form in the UK as it’s still legal tender and capital tax gain exempt.