With stock markets plunging and the economy falling, the biggest beneficiary of this latest panic is gold. When China first raised the alarm about the Corona virus outbreak and institutes a shut down in Wuhan, investors bought more gold sending it to a seven-year high of $US 1,700 per troy ounce. However, what does this mean if you are not living in the U.S but in Australia where the domestic currency the Aussie dollar is not at all equal to the U.S dollar? What about the gold price in AUD? The fact is the gold price AUD is outperforming the price of gold in U.S dollars. An Aussie dollar is actually higher in terms of gold. This means Australian investors will have better return on their investment in gold than an investor based in the US.
Why do we measure gold in more than one currency? To answer that we have to look at the forces driving gold the US dollar and the Australian dollar? Why measure currencies against gold to begin with? Why would you even measure gold against the Aussie dollar when gold is priced in US dollars on the world markets? For stock market traders, measuring gold in various currencies is important. Gold acts as a perfect calibration when it comes to judging the performance of different currencies.
So what drives the price of gold in AUD?
The factors that affect gold are the same whether gold is measured in USD or AUD.
Here are the reasons the demand in gold is high now and likely to remain high for some time:
- Investment demand for gold has been growing because it is regards as a safe haven. It is likely to go on for some time especially with the Covid-19 pandemic.
- Central banks have been buying a record amount of gold. 2019 saw the Russian, Turkish, Polish, Hungarian and Kazakh central banks buying the most gold. The outlook for this year looks the same as central banks are expected to diversify even more.
- Coming Fiscal And Monetary Policy
When the Corona virus crisis first hit Australia, the Reserve Bank of Australia cut rates to 0.5% on the 3rd of March 2020. On the 17th of March it pumped AUD12.7 billion into the Aussie banking system. Meanwhile, the US Fed cut rates by a full percentage point, leaving them at 0.25%.
The US Fed and the RBA has unleashed an incredible amount of liquidity to help struggling businesses and households. Since the Corona virus emerged out of China, the markets and the main streets have been in a panic unlike anything seen since the second world war.
Everyone has been in a panic buying in preparation for the worst. There has been a complete shutdown of economies across the globe as countries try to curb the spread of the virus. This affected businesses and created an unprecedented spike in unemployment claims. Central banks may have had no option but to print more money. Because of all of this, gold will likely be a major beneficiary.
- The US and the Aussie Dollars
As with the financial crisis in 2008, there was an initial scramble for US dollars. This could only be a short term need that accelerated the downward pressure on the Aussie Dollar versus the US Dollar. This has been a long-term trend.
Unfortunately, the US dollar remains the world’s reserve currency whether we like that or not. As proven during the 2008 financial crisis there was a run to the US dollar following the shock to the financial system.
With the global economy in turmoil, the interest rate differentials are in favour of the Australian Dollar but the US dollar is currently acting as a safe-haven. Despite this and the fact that it serves as a currency for a small economy and small population, the Aussie dollar still manages to rise above its weight. It is still one of the five most traded currencies in the globe.
Is this a good time to trade gold In Aussie dollars?
In times of crisis, strong momentum markets do not get weaker but they get stronger. However, investors need to buy into markets not when they are going to new highs but when they’ve pulled back in uptrends.
The good news is that the such a pullback has occurred because of the surge in the value of the US dollar. It hit a high of $1680 and then pulled back to $1500. Downsides were expected and the price has since risen steadily. This might be a good time to trade gold in Australian dollars or to hold off for longer for the gold price to rise further. Who knows what the gold price AUD will be when the price hits the $2,000 that everyone is claiming to be inevitable.