Gold is a very popular trade on the derivative markets, but it is possible to have a closely correlated trade with the currency market. If we look at NZD/USD and gold over the long term, we can see there is almost 95% positive correlation between GOLD and NZD/USD. Whenever gold rises, very often NZD/USD rises too.
Let’s take a look at the charts:
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Anyone who has traded gold on the futures market will be aware that holding a long position over the long term is very expensive. This is because effectively for the value of the gold you are long on, you have to pay the equivalent of the same amount would earn in cash. The reverse is true for short positions. With futures this is included in the pricing. At the time of writing these are the gold futures prices:
spot 673.33
dec08 714.8
dec09 747.9
dec10 764.9
All futures prices equal the spot price on expiry. So as you can see holding a long gold position on the futures markets costs a considerable premium. However, the reverse is true if you are short. The advantage of holding a long NZD/USD position is that that would earn interest at present as there is a 3% difference in the NZD and USD central bank rates, 8.25% and 5.25% respectively.
Conclusion
Using NZD/USD might be a better option for taking a long term bullish view on gold due to the fact you earn positive interest. However, rates can always change so this is not necessarily going to be the case in a years time. There is the added risk that NZD/USD is not guaranteed to follow gold as there are many many other factors that influence a nation’s currency. A big example of this is the big carry unwind in July 2007. The carry pair NZD/JPY crashed down and dragged NZD/USD down with it. There is a chance in the long term things will all balance out though.
