When we talk about gold price, we generally always talk of that price being in US dollars. Today, I want to how the british pound and the dollar compare when they are used to value gold.
The US and the UK economies and their currencies have been severely battered over the last year or so, and it is this reason why their relationship with the yellow metal is so interesting.
The graph above shows a year's relationship between the US dollar and the British pound. As you can see, the pound in November '08 is worth around $1.60 US. This drops to below $1.40 in February '09 and March '09, and then climbs back up to stabilise between $1.60 and $1.70 from June onwards.
Now lets compare this to the relationship the gold price has had with the British pound over the course of a year.
The November '08 gold price starts off at £450 per troy ounce. It reaches it’s all-time high in February at £692. Following this, it peters out slightly to around £570 in August before rallying to over £650 by October.
In contrast the dollar starts in November at around $750 per troy ounce. This rises to $1,000 in February, then falls to about $875 in April, before rallying once again and continuing that rally until the present today. The gold price today stands at $1054.75 (am gold fix price).
So for the last year gold has risen approximately 44% when valued in pounds sterling.
When valued in dollars gold has risen approximately 42%.
If we were to take the all-time high gold price for the sterling pound at £692 in February and the price in August at £570, and compare this to the same period for the dollar, $1,000 in February and $940 in August.
In pounds we would have made a loss of £122.
In Dollars we would only have made a loss of $60.
Quite a significant difference, especially when one also takes into consideration the exchange rate between the pound and the dollar
What can we gather from this?
When the Dollar is at its strongest, compared to the pound, between February and March, the price of gold reaches new highs against both the dollar and the pound. After this, the pound against gold declines rapidly for several months. Whilst the dollar against gold suffers a minor set back of a much shorter time span (one month), and then it recovers quickly and overtakes the previous record gold price.
With the weakening of the pound, the gold-pound relationship took a tumble, which continued for several months, even after the pound grew stronger.
Gold is rising in all major currencies at the moment. It appears that, whilst inter-currency relationships may have a bearing on short term profits, (e.g. going long and short in future contracts), it is still very much a hedge against fiat currency rather than just a hedge against the dollar.
It would also be wrong just to report the gold price in terms of dollars, as the sterling pound does not always follow exactly the same pattern as the US dollar. Therefore UK investors may be unaware of any fluctuations in the price of gold.
Disclosure: No positions