Does Being Long Gold Really Mean Short the U.S. Dollar?

Includes: FXE, GLD
by: Chris Ridder, CFA

I was reading the article "Dennis Gartman's Unique Gold Investment Strategy" when I came across the following statements:

...As Mr. Gartman says, 'If you buy gold, by definition you have gone short of the U.S. dollar.' " and "Gartman recommends building a position in other currencies. How? Here’s the recommendation, straight from the horse’s mouth: 'If you bought $100,000 worth of the gold ETF (GLD), you would sell $100,000 worth of the euro ETF (FXE). And essentially what you have done is construct gold in euro terms.'

My main contention is that the statment, "If you buy gold, by definition you have gone short of the U.S. dollar" is incorrect. Now empirically, over various periods, the dollar index and gold price in USD might be shown to have a negative correlation. However, if one purchases gold using U.S. dollars (USD) then one is long USD and not short.

If the price of gold is $1500 USD and a year later the price of gold is $1500 USD, then zero return has occurred in the USD. However if over this time the USD index has fallen from say 75 to 70, then a loss of 6.67% has occurred in the USD relative to other currencies. If the USD index rose from 75 to 80, then a gain of 6.67% would have occurred. Over the course of a year, the USD index could stay flat at 75 and the price of gold could move hypothetically from $1500 down to $1400, a 6.67% loss, or up to $1600, a 6.67% gain. The point of this exercise is that an investor can know, a priori, that buying gold in USD makes one long USD.

An investor can look at the charts and data of gold priced in various currencies from the world gold council.

Take a look at the price of gold in British Pounds. Click on charts to enlarge:

Now look at a chart of the GBP compared to the USD over this time.

Graph of U.S. / U.K Foreign Exchange Rate


One can see how much greater the swings of the British Pound were relative to the USD than the price of gold. An investor in India even sees a multi-decade bull market in gold when priced in the Indian Rupee:

An investor must understand that buying a gold ETF and shorting a currency ETF are two separate trades and not just buying gold in a different currency. And they should be managed as such. The empirical correlation of the risks of the two separate trades might be very high at times, but it must be understood that it is not fixed.

Both trades could end up losers in theory, if the price of gold falls and then the currency shorted rises against the USD. For instance, if the ECB raised rates, it could attract deposits and strengthen the Euro. At the same time, it would depress the price of gold as inflation would be seen as less of a threat. Now this is very hypothetical with all the drama going on over in Europe! However, I hope this article clarifies that the price of gold in U.S. Dollars is different then the relative price of the USD to another currency.

Disclosure: I am long GDX.

Additional disclosure: Long gold and gold stocks