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Is Gold A Currency Substitute?

|Includes:FXB, FXE, FXY, SPDR Gold Trust ETF (GLD)

Gold has had an impressive performance over the past few years with gains of (27%, 10% & 6.6%). Further real-rates have gone negative across the developed markets. Gold has been a proxy also for policy uncertainty although its record as a hedge for the Fiscal Cliff has been patchy at best.

Traditionally Gold has been considered a commodity and its fair value estimated based on Demand and Supply. Gold has very few industrial uses and most of the demand for Gold Jewellery comes from Asia. (Indian and Chinese savers) The recent weakness in the Rupee hasn't helped Gold and Gold in rupees has hit all time highs. Supply of Gold has been flat and prospecting/investment in new mines tends to pick up with a run-up in Gold prices.

The recent demand from EM Central Banks who have been buying Gold for reserve diversification makes it more currency like than a commodity. EM Central Banks such as China, Russia, Korea, India, Mauritius, Argentina have all been diversifying their reserves in to Gold. Central Bank balance sheets traditionally were made up of a basket of developed market currencies EUR, GBP, JPY & USD. The monetary easing by the Fed, BoE, BoJ and soon ECB is seen as an attempt at competitive devaluation of their currencies.

We look at the 20yr historical performance of Gold agst a Basket of these Currencies below. We find that a Long Gold position agst a Basket of these currencies has had a similar performance (risk and return) characteristics to being Long Gold.

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[One could generate this position by being long GLD & selling short the currency ETFs FXE, FXB, FXY. Note a short position in these ETFs incurs borrow fees.]

Disclosure: I am long GLD.

Additional disclosure: This note is for informational purposes only. Positions in these securities (or lack thereof) may change at any time without notice. None of the tables/charts nor any of the comments are meant in any way to be considered personal financial advice. They are solely prepared and provided as food for thought and purely for informational and entertainment purposes. Any investment decisions and actions are solely the responsibility of the reader/investor based on their own assessment of appropriateness related to their overall financial and risk profiles. Any representation to the contrary is unintentional.

Stocks: GLD, FXE, FXB, FXY