Gold stock investors following the ‘wrong dollar’

While gold has fallen in US dollars this year it has actually risen in most major gold producing nations’ domestic currencies which have themselves fallen against the greenback. While gold stocks seem to move regardless along with the US currency, given that mining costs are mostly in the local currency, it should be this that investors follow in assessing the gold price’s real economic impact on the companies they may be investing in.


by Lawrie Williams

Surbiton Associates is a Melbourne-based Australian consultancy which has been analysing that country’s domestic gold mining sector for around 20 years. In commenting on its latest quarterly survey of the domestic gold mining industry, Surbiton Director Dr. Sandra Close made some extremely pertinent remarks re. gold stock investment, specifically in Australia, but equally relevant to other countries where a rising US dollar parity against the local currency has meant that although the gold price may have fallen in U.S. dollars it has actually risen in the local currency. This actually applies in most gold producing nations, but particularly so in those with strong domestic stock markets where domestic gold mining stocks have always been an important investment sector –notably Australia, Canada and South Africa.

Dr. Close commented as follows: “Despite lower gold prices in US dollar terms, the depreciation of the Australian dollar is proving a blessing for Australian gold producers. Although the gold price averaged US$1,192 per ounce in the June quarter, the Australian dollar gold price averaged A$1,532 per ounce. It’s reminiscent of what happened in 2008.”

“I often wonder why local investors place so much importance on the US dollar gold price” Close went on. “It is the Australian dollar gold price that matters to local producers as their costs are mostly in Australian dollars. Focus on the margin. I find it quite bizarre to see the share prices of Australian-domiciled gold producers fall in response to a decline in the US dollar gold price when, due to a change in the exchange rate, the Australian dollar gold price has actually risen.”

So far this year, the gold price in Australian dollars has risen by around 9%, while the US dollar gold price is down around 4%. Canada has seen gold rise some 8% in the Canadian dollar, while in the South African Rand, the gold price has also risen by around 9%. This has had a huge impact on domestic gold mining economics in those three nations which, between them, produce almost 20% of the world’s annual supply of newly-mined gold.

World’s Top 10 Gold Producing Nations

Rank Country 2014 gold production (t) YTD Gold Price movement in Local Currency
1. China 462.0 – 2%
2. Australia 272.4 +10%
3. Russia 266.2 +1%
4. USA 210.8 – 4%
5. Peru 171.0 +3%
6. South Africa 167.9 +9%
7. Canada 151.3 +8%
8. Mexico 110.4 +8%
9. Ghana 104.1 +15%
10. Brazil 90.5 +30%

Source:  Lawrieongold, Metals Focus, 24hgold

It is also worth comparing gold’s performance in these local currencies with some of the world’s most important stock indices over the same period. As can be seen from the table below, compared with the table above, gold has actually outperformed the stock markets in most countries. In two major markets where stocks have actually risen year to date, Germany and Japan, gold, which is higher by 2% in Euros has stayed level with the stock market over the same period in the former, while Japan is one of the few countries where the reverse has been true with gold down 4% in the yen, while the stock market there has risen by a similar percentage.

Major Stock Market performance 2015 YTD

Country/Area Index Change YTD
USA Dow Jones -9%
USA S&P 500 -6%
USA NASDAQ Composite -1%
Germany DAX +2%
UK FTSE 100 -7%
Japan Nikkei 225 +4%
Hong Kong Hang Seng -10%
China Shanghai Composite -2%
Canada S&P TSX Composite -6%
Australia ASX -4%
South Africa JSE All Share -1%

Source: Yahoo Finance, lawrieongold