Hedging U.S. Dollar Risk and Capturing Gold Upside with the Australian Currency ETF

I am intrigued with the idea of supplementing my portfolio hedges with the Australian dollar. It has a high correlation with the price movements of gold, although the exchange rate is obviously impacted by many other factors as well.

One of the new ETFs, CurrencyShares Australian Dollar Trust (NYSEARCA:FXA), holds a portfolio of Australian Dollars and pays the country’s overnight rate, which is currently 6%. That rate is expected to remain stable for the time being. Of course, FXA’s .40 expense ratio will be decucted before the trust makes distributions.

The Aussie dollar has been under pressure due in part to the declining prices of gold and copper, which the country exports in large quantities. FXA is currently at 74.65. I would not expect it go below 68 due to gold price movements, unless gold fell below 370.

I am planning to initiate a position in FXA when I feel the price of gold and the Aussie have stabilized. Jim Wyckoff expects solid support to develop for gold at 557. It looks to me as if gold could have enough momentum go as low as $496 without much trouble, and a decline back to the 250-350 range is always a possibility.

FXA is no substitute for direct investment in gold, but it appears to be a relatively safe way receive 5%+ and offset some U.S. dollar risk, while being positioned to participate in any explosive upward price movement of gold which may occur in the future due to unforeseen circmstances.