Gold Investment "Best Understood as Currency Hedge"

THE relationship between gold and the US Dollar – as well as its interaction with other important currencies – means Gold Investment is best understood as a hedge against currency values, according to the latest quarterly gold commentary from the World Gold Council, the gold market's key market development organization.

"Gold’s relationship with the US Dollar is more complex than often perceived," the commentary says.

"While holding all else equal, gold tends to rise when the US Dollar falls...[but] the relationship between gold and the US Dollar is less stable when both benefit from investors looking to preserve capital as seen in 2008, 2009 and 2010."

The WGC also argues that Gold Investment can be looked at as a hedge against other key currencies.

"The growing importance of other currencies for gold such as the Indian Rupee, Chinese Yuan and Russian Rouble has increased the significance of gold as a global currency hedge," it says.

There is evidence to suggest, the WGC finds, that as well as offering a potential currency hedge, Gold Investment offers exposure to different factors that those that tend to affect stock markets, an argument in favor of gold offering portfolio diversification. 

"The US Dollar has a statistically significant (negative) long-term relationship with gold," the WGC says, "while equity returns typically do not explain any variation in the Gold Price."

Gold Prices gained 8.6% in the first quarter of 2012, based on London Fix prices. Over the same period, the US Dollar Index – which measures the Dollar's strength against a basket of other major currencies – fell 1.5%, while the S&P 500 gained 12%.

The WGC produces regular gold research that is used by professional investor to form a long run view on Gold Investment.

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