How To Be Bullish Gold Through The Currency Market

Last updated 11/4/2009 4:43 AM EST (GMT -5) 2 Comments

Boris Schlossberg

Director of Currency Research, GFT

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.

Comments (2)

FXDragon

November 04, 2009 at 09:35 AM ET

It could be the wedding season in India:) What are the other top 5 gold producing nations besides aud and cad? I wouldnt be surprised if russia and brazil bought some.

bschlossberg

November 04, 2009 at 09:37 AM ET

South Africa and Russia

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About The Author

Boris Schlossberg began his Wall Street trading career more than 20 years ago at Drexel Burhnam Lambert. There, he traded nearly every type of financial product on the market in the U.S., from equities and options to stock index futures and foreign exchange. His innate ability to analyze market information and use it to trade has helped him become an industry-recognized, “go to” trading professional.

These days, whenever the markets move, many organizations turn to Schlossberg for his take on the situation. He is a weekly contributor to CNBC's Squawk Box and a regular commentator for Bloomberg radio and television. His daily currency research is widely quoted by Reuters, Dow Jones and Agence France Presse newswires and appears in numerous newspapers worldwide. Schlossberg has written for publications like SFO magazine, Active Trader and Technical Analysis of Stocks and Commodities. He is also the author of Technical Analysis of the Currency Market and the co-author of Millionaire Traders: How Everyday People Are Beating Wall Street at Its Own Game with Kathy Lien. He joined GFT in 2008.