Where IS Gold Headed?

February 17, 2011

Where does gold go next? It all depends on what currency you're looking at.

 

For some investors, the headline question is a forgone conclusion. For others, gold's price destination isn't so certain. Answering the question in great part depends upon one's time horizon.

Traders tend to have short—or shorter—investment horizons. That's not to say that they may not hold gold core positions for the long term. Many do, while they trade in and out of gold to capture intermediate- or short-term price trends.

Traders also have a choice of currency in which to trade. Bullion's gains and losses can be levered by trading in sterling, Swiss francs, euro or yen instead of U.S. dollars.

Gold's longer-term price track has been upward in all the reserve currencies since the launch of the euro in 1999, although the average rate of appreciation varies. You would, for instance, have earned the best average return if you'd bought your gold in sterling; less if your original purchase was in Swiss francs.

 

Gold Price (Jan. 1, 1999 to Feb. 16, 2011)

Currency Average AnnualReturn
USD 14.6%
GBP 14.8%
EUR 13.1%
JPY 11.6%
CHF 11.1%

 

There were plenty of peaks and valleys, however, that one could have traded as gold worked its way higher (or, from another viewpoint, as currencies worked lower). For example, gold appreciated at a higher rate against the euro early in the currency's career. Then, as its appreciation against the euro dipped, gold began trading higher against the greenback and the pound:

 

Gold Price Since 1999

Gold Price Since 1999

 

Over the past couple of years, there's been a lot of volatility in bullion's price across the forex market. Notice, in particular, the reversal of the euro's fortunes compared to the Swissie and yen.

 

Recent Gold Price Trend

 

Currency

2009

Return

2010

Return

USD

25.0%

29.0%

GBP

22.9%

32.8%

EUR

13.6%

39.5%

JPY

25.6%

14.0%

CHF

22.9%

16.9%

 

Viewed from a peculiar perspective, the U.S. dollar seems almost stable. Or at least its rate of degradation against gold has been more consistent.

And now? How has gold fared against the major currencies in 2011?

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