Gold investors urged to consider currency exposure

The price of gold is quoted in US dollars, so it makes sense to look at hedging out the risk of that paper currency moving over time, Swiss & Global’s Stephan Müller says.

Taking some exposure to gold is a good thing, according to Swiss & Global (S&G) Asset Management, but investors should also take currency fluctuations between the US dollar and their base currency into account.

Investors risk eroding their returns from the precious metal if they are not hedged against changes in cross rates, the Swiss-headquartered manager cautions.

Stephan Muller, executive director of product management and development, says the danger is shown by the fact that an unhedged euro-based investor in bullion underperformed a hedged equivalent by 22% since end of October 2008.

The unhedged investor is subjected to any moves (adverse or advantageous) in the cross rate between the US dollar, the base paper currency in which precious metals’ prices have historically been measured, and the investor’s home currency.A hedged investor cancels out any such fluctuations.

Over the shorter term, since the beginning of January, the unhedged euro investor underperformed their hedged equivalent by 10%.

Muller says: “Foreign exchange moves can be very destructive and their effects can kill any benefits of the actual investment. Currency hedging should not be a privilege drops in the US dollar come overnight.”

This has indeed happened at various times since the financial crisis ended in March 2009, as Washington has printed money to support a recovery, the US economy has wavered and the national debt has hit the legally allowable ceiling.


It has not just been US weakness that has caused problems, however. In mid-June, the euro approached a one month high as markets predicted European Central Bank president Jean Claude Trichet would signal a rate rise.

“You generally want an investment to be pure, in the sense of knowing what risks you are taking when you make it,” says one investor in a bullion fund.

Given all of this, S&G has euro and Swiss franc-hedged shares, as well as sterling for each of its Physical Gold, Platinum and Palladium funds.

The JB Physical Gold fund it runs has made 10%, in US dollar terms, so far this year, based on the London fixing rate of $1,545/troy oz.

The $448.5m JB Physical Silver fund, meanwhile, has returned 19.7% this year, based on silver at $37.41/oz.

The $177.1m Platinum and $71.8m Palladium funds in its range are up 3.33% and down 1.37% this year, in US dollar terms, based on metal prices of $1,824/oz and $804/oz.

Muller says investors may opt for hedged share classes if they fear further quantitative easing, which has the effect of debasing the value of the US dollar against major peers such as the euro.

S&G also helps investors guard against devaluation of their investment when they withdraw from the JB precious metal funds by allowing redemptions in specie.

So far, its $4.8bn Gold fund has met 12 such in kind redemption requests, for 23 bullion bars. At 400oz per bar, it has delivered 9,147oz of the metal to withdrawers.

S&G also delivered 3,035oz of silver from its Silver fund to satisfy three in specie redemptions for three silver bars.

Muller adds: “In case we get another Lehman Brothers crisis, having access to the gold is also about an emotional argument that you have access to it if banks go bust. Our products are not notes or trust. They are funds that are not on the balance sheets of any bank, so the funds are designed to protect investors not banks”.

“Investors do not want virtual exposure through deriva- tives because they are looking for a safe haven, not exposure to another balance sheet. If you offer a safe haven, it has to have the real asset. Investors want a hedge against inflation. You can print money, but you cannot print more gold.”

Muller adds that gold is “a safe haven in economic storms”, while the white precious metals that S&G hold in fund for its clients are more a bet on the economic recovery.

“Since Fukushima, the white precious metals have come more and more into focus for the energy transition towards renewable energyproduction,”he says.

David Walker

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