Why the USD gold price should not matter to European investors

News 15.04.2015

Quite a few gold investors may have been confused by the media coverage regarding the gold prices in recent months: from 'Gold price is dropping significantly' to 'Gold loses magic and meaning' to 'Golden times? Not at all!', the headlines of public media and trade press alike have given the impression that the precious metal is amidst a crisis. And indeed, the price of gold had decreased by around 1.7 per cent since the beginning of 2015 until late March. However, those who regularly check their securities portfolios will have noticed that their gold investments actually gained almost 9.6 per cent in value in the very same period. How is that possible?

The explanation is plain and simple: neglecting the monetary sovereignty of the euro zone, almost all media report on gold price in US dollars (XAU/USD). While the strengthening of the US dollar led to losses in the XAU/USD, gold in EUR has appreciated significantly during the same time span – more than 5.6 times the value loss experienced in USD, to be exact. The XAU/USD exchange rate tells as much about the development of US currency as it does on the gold price and, therefore, has little relevance for European gold investors. For historical reasons – until 40 years ago, the gold price was tied to the US dollar – gold has always been treated as a form of currency, and has been evaluated as such.

However, the only valid measure of gold is its weight, priced in the investor’s local currency. While in the USA the weight of gold is defined in fine troy ounces, in Europe the gram is considered the benchmark, with the fine troy ounce equalling 31.1035 grams. To correctly interpret the preferred medially reported gold price XAU/USD, the following conversion is necessary:
Gold in euros per gram = (XAU in USD per fine troy ounce divided by 31.1035) divided by the EUR/USD exchange rate. This formula – which is also a means to determine and control the price of Xetra-Gold® very easily – clearly shows that the XAU/USD rate has almost no significance to investors in the euro zone and should be irrelevant for investment decisions.

Arnulf Hinkel,
Financial journalist

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