Sep 032015

Back in July I said that “an investment in AUD gold may represent a reasonable bet” given that “the general consensus on the Australian dollar is that it will continue to weaken due to a poor economic outlook with commodity prices falling”.

Today, Australian media are reporting that the AUD/USD exchange rate will reach 0.60 by end of 2016. First is Deutsche Bank chief economist Adam Boyton quoted as saying that the dollar will keep falling to US60¢ by the end of 2016 and he “wouldn’t be surprised if the Australian dollar is printed with a ‘five’ handle in the next three years”. That article also says “Suncorp senior economist Darryl Conroy is also expecting the dollar to fall towards US50¢”. The Sydney Morning Herald was quoting AMP chief economist Shane Oliver as saying “he expects the dollar to reach US68¢ by the end of the year and slide to US60¢ throughout 2016”.

If the Australian exchange rate does fall to USD 0.60, then that puts a strong floor under the Australian gold price. The following conservative USD gold prices at that exchange rate equate to:

USD 800 = AUD 1,333
USD 1,000 = AUD 1,667
USD 1,200 = AUD 2,000

The chart below puts those moves into context.


USD 800 is the most pessimistic forecast of the mainstream gold analysts, and would represent an 18% fall in AUD terms from today at an 0.60 exchange rate. This is not an unrealistic scenario, as the effect of changes in the Australian exchange rate on the AUD gold price, if driven primarily by USD strength, will be counteracted by a fall in the USD gold price.

While the USD 800/FX 0.60 combination results in a big loss, it does need to be weighed up against the upside. I have spoken to some Australian investors who are expecting the Australian economy to fall into a recession and are thus expecting the exchange rate to weaken and house prices to fall, but for the USD gold price to rise at the same time on the back of weak Chinese and global economies. In that scenario, a conservative USD 1,500 gold price at 0.60 is AUD 2,500 per ounce. These investors are expecting a 40% reduction in average Australian house prices, which would bring to house price/gold ratio down to levels it has reached in previous recessions, as shown in the chart below.


As discussed earlier this week, their plan is to switch out of gold and into other hard assets. Ultimately it comes down to whether you think that the Australian dollar’s fall is going to be driven more by factors unique to Australia’s economy and thus the USD gold price will not necessarily fall at the same time, resulting in a surging AUD gold price.