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All that is gold glitters?

⊰ 2022-08-19 by ShaunO ⊱

As a purely academic exercise I was trying to get my head around any correlation between gold prices, us$ strength, and us$-au$ crosses..

Why? well I, for some unfathomable reason (given in general my math is OK), have always had an 'imaginary blockage' when it come to currency crosses and the like - reverse correlations if you like. The math is fine, it's being able to quickly look at the numbers and intuitively assess loss or gain based on index/currency differences, or 'crosses'..

Anyway onto gold - if you're going to trade gold via an ETF this can get a bit tricky because:

a) what's the ETF tracking (which gold market and in which currency)

b) if it's tracking in other than AUD (e.g. normally in USD) you're 'wearing' the fx risk (the rise and fall of say the AUD <->USD pair) as well as the gold price risk itself

c) more esoteric, but you need to know, is it physical gold or?.. and if physical, is allocated or unallocated? I'm not going to deal with that here, you'll have a do a "google is your friend" on that one 🙂.

So, picking the 'GOLD' ETF (asx:gold) as an example - it's physical gold in a vault in London, but it tracks in US $. So if you're anticipating 'general strength' in the USD dollar (i.e. the USD dollar index, which represents USD against a 'basket' of other currencies) what effect might that have on gold prices? And then the "reverse correlation double up" is if gold price strengthens but is priced in USD and you're buying ETF in AUD which direction will ETF price go if gold price, in USD, goes up and the value of AUD->USD is falling..

You see? This stuff just does my head in - like I said, I can easily do the math, but I seem to have a blockage in 'picturing' these 'double reverse' relationships. With most other things I can 'intuit', or visualise graphically if you like, just off the numbers - so with most things, on first blush, even though I can do the math, I don't need to, unless the result 'looks' very close..

Anyway - 'this here graph' (as they would say 'way out west' 😛) shows the relationship between USD index, GOLD.ASX ETF, and the AUD-USD cross fx rates.. (which frankly does not appear on a short term, year-to-date, to have any strong correlations). Interactive here


confused? well that's OK because it is confusing (well, unless you've done this stuff for a living all your life I'm guessing, because then it probably does happen in your head 'automagically' 'coz that bit of your brain is very 'practised', and therefore strongly 'wired', for these types of numerical relationship problems..)

Anyway, end of part one, and buggered if I know 😛

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