Aussie Gold Producers the Big Winners from Weaker Dollar

Aussie gold producers are having a good year. Compared to this time last year, the spot price of Aussie gold is up by $100 an ounce.

Prices steadily rose from $1,350 to $1,600 an ounce between September and January 2015. The annual price of gold then peaked at $1,650 in mid-January.

Since then, bullion has traded in a band between $1,500–1,625 an ounce.

The latest figures show that Aussie gold prices averaged $1,532 per ounce in the June quarter. That data comes from mining consultancy Surbiton Associates.

And it’s also in stark contrast to US gold prices, which averaged US$1,192 during the last quarter.

US spot gold was up 0.8% early this morning Australian time. But it’s still down 2.3% for the week. Worse still, US gold prices are US$172 lower than this time last year.

Why is Aussie gold doing so well, especially as US gold prices tank? It all has to do with the US dollar. The stronger greenback is indirectly helping push the spot price of Aussie gold higher. I’ll explain how.

The difference between Aussie and American gold prices

Investors have a tendency to mix up gold prices when referring to the broader market. For instance, they might use US prices as a measuring stick for prices in Australia.

But gold is measured relative to any given currency. Yet this doesn’t always prevent investors from conflating US gold prices with Aussie ones.

Put another way, gold prices aren’t measured in the same way as currencies. Global currencies move in direct relation with one another. Gold, on the other hand, moves in relation to specific currencies.

If you looked at US gold prices, you might think gold is in better shape in the US. After all, if we account for the differences between the two currencies, gold actually fetches higher prices in the US. An ounce of US gold, purchased with Aussie dollars, would cost more than an ounce of gold in Australia.

But that’s not how things work.

Gold prices are measured against domestic currencies. That is, markets in which the gold is produced and sold. Using that perspective, the Aussie gold market is much better off than the US one.

Knowing that, we’d see that gold is trending down against the US dollar. As previously mentioned, spot gold is down $172 dollars since last year. Again, that’s because the greenback is trading higher over the same period.

Yet Aussie gold, on the other hand, has seen spot prices rise by $100 in the last year.

As you’ve probably figured out, it’s not quite as black and white as that.

We can’t compare US and Aussie gold prices directly, because they’re priced differently. But that doesn’t stop the difference in currency valuations from weighing on gold prices. How?

Consider the following.

The rising US dollar puts downward pressure on the Aussie dollar, right? The stronger the US dollar, the weaker the Aussie dollar becomes.

This time last year, the Aussie was almost at parity with the greenback. Today, it’s sitting at $0.71 to a US dollar.

This devaluation against the US dollar benefits Aussie gold prices. That’s because weakening currencies lift demand for gold. As gold doesn’t pay interest, investors tend to move money out of the precious metal when currencies rise.

So the strength of the USD is what’s keeping gold prices subdued in American gold markets. And there could be further pressure on US gold prices over the next month.

The uncertainty surrounding interest rate movements is adding to pressure on US gold prices. Higher US interest rates could lower gold prices further, because they raise the prospect for an even stronger greenback.

All of this is welcome news for Aussie gold producers however. If the Aussie dollar continues its slide, it’d come as a boon to domestic gold prices.

Aussie gold production is on the rise

Reflecting rising prices, Australian gold production rose 4% in the June quarter. That resulted in an additional 72 tonnes compared with the first quarter.

Over the past year, output has risen 1% to 285 tonnes. That puts Aussie gold production behind only China, which produced 450 tonnes in 2014.

Australia’s two biggest gold producers are have both gained ground on the ASX in the last five days.

Finally, let’s quickly look at how Australia’s biggest gold producers are faring on the stock market.

Newcrest’s [ASX:NCM] stock is up $0.45 since last Thursday, trading at $11.27.

Alacer Gold Corp [ASX:AQG] is trading $.025 higher since Thursday, at $3.04 a share.

Meanwhile, Evolution Mining [ASX:EVN] is up $0.09 from Thursday, at $1.02 a share.

Mat Spasic,

Contributor, Markets and Money

PS: Most gold investors take little notice of prices. While it’s reassuring to watch prices rise, it’s also not the reason they own gold. Rather, they see it as the perfect safeguard of wealth.

In a global economy filled with so much uncertainty, owning gold seems more necessary than ever before. While Australia weathered the 2008 GFC, it might not be so lucky this time around.

Markets and Money’s Greg Canavan says Australia is on course for its first recession in 23 years.

In a free report, ‘Australian Recession 2015: Unavoidable’, Greg reveals why our economy finds itself in the hole it’s in. He’ll show how debt levels have spiralled out of control. And he’ll prove why that means a recession is almost inevitable.

But there are actions you can take right now to lessen the blows of the recession.

Download your free copy today to learn how to protect your wealth from the fallout of the crash. To find out how to download his free report right now, click here.

Markets and Money offers an independent and critical perspective on the Australian and global investment markets. Slightly offbeat and far from institutional, Markets and Money delivers you straight-forward, humorous, and useful investment insights from a world wide network of analysts, contrarians, and successful investors.

Leave a Reply

Your email address will not be published. Required fields are marked *

Markets & Money