Why you shouldn't currency hedge gold

Let’s take a look at the correlation of the gold price in US dollar terms and AUD/USD currency movements since the Australian dollar was floated in December 1983. Correlation measures how strong a relationship is between two variables, in this instance, US dollar gold price movements and changes in the value of the Australian dollar compared to the US dollar.

In the scatter graph (Figure 1) below, you can see there is no specific relationship between the movement in the gold price and changes in the AUD/USD rate because the dots fall in all four quadrants of the graph, they are not skewed to any area.  There is no pattern.

One way to express correlation is a statistical measure called R², pronounced “R squared”. The results of an R² analysis gives you a score between 0 and 100%. An R² of 100% would indicate that movements in the gold price can be predicted by movements in AUD/USD.  However, as shown below, the R² is only 13%, therefore there is no evidence to suggest the two variables correlate.

Figure 1: Gold price (USD) versus AUD/USD monthly movements since 1984

Now, comparing the movements in the two variables over different decades we see each decade produces similar, uncorrelated, results.

Because the two are uncorrelated there is no investment rationale to hedge your gold and gold miners exposure back to Australian dollars. 

The decision to hedge your exposures is complex. Always speak to a financial adviser to consider your individual financial circumstances, needs and objectives and read the relevant PDS before making a decision to invest. Currency movements are unpredictable and volatile and are just one of the many risks investors have to navigate in these tricky times.