Gold has hit yet another record high rising to $1093/oz in overnight trade. The latest surge has been triggered by news that India’s central bank purchased 200 tonnes from the International Monetary Fund – the largest such transaction by a central bank in over thirty years.
Analysts opinion regarding this move diverge greatly, with some dismissing the action as mere currency management by Indian monetary authorities, while others seeing the rise in gold as part of the larger theme away from dollar dependent reserves. There is little doubt that gold is essentially a fear trade, driven by anti fiat currency sentiment at a time when most of the G-10 economies are running record fiscal deficits that threaten their balance sheet positions. Aside from jewelry, the metal has few industrial uses and the recent run up has been helped tremendously by the lower interest rate environment in the G-10 universe which has made carrying costs for the yellow metal much more palatable for long term investors.
We continue to remain constructive on gold as long as it remains above the $1000/oz level, but those investors who would like to express a bullish view on the precious metal should also consider the Australian dollar as a possible FX alternative. Along with Canada, Australia is one of the top five producers of gold in the industrialized world. However, unlike the loonie which only yields 25 basis points the Aussie carries a 3.5% yield – the highest in the G-10 universe.
The AUD/USD has not had any serious correlation with the price of gold for more than several years, trading primarily on risk assumption and risk aversion flows. However, that situation could change rapidly if the rally in gold accelerates attracting further attention to the trade. An early indication of this possible new dynamic can been seen in tonight’s price action. Despite the disappointing Australian Retail sales number, the AUD/USD has climbed to a high of 90.74 in early European morning trade as gold prices hover near the $1100/oz. mark. If gold breaks that key psychological level, the Aussie could follow suit offering currency traders the dual benefit of high yield and further capital appreciation.