The gold price is taking a breather. It may have been the top performing major asset class of 2024, with a 25% gain. But the precious metal actually ran out of gas way back at Halloween.
The thing is, the gold price in Aussie dollar terms continued its uptrend late into the year. And ended up by about a third in 2024!
The divergence is explained by a plunging Aussie dollar on foreign exchange markets. It’s a good reminder that currency moves can make or break your returns.
Have you factored that into your expectations for 2025?
Predicting exchange rates is notoriously difficult. And yet, it has a huge impact. Especially for Australians.
We believe it’s always a good time to own some gold, especially outside the financial system. It’s an important source of diversification for the sorts of risks your financial advisor won’t tell you about.
But in 2025 I suspect there’s a better way to play the gold bull market as the currency moves stop being in your favour…
The Aussie dollar is plumbing the depths
The Aussie dollar recently hit a five-year low. That’s not so extraordinary in and of itself. What makes it intriguing is that there was no obvious macro-catalyst to explain why.
Our currency is a notoriously volatile beast. It is also considered a ‘risk-on’ currency. In an economic boom, it soars past parity with the US dollar. And when there’s some sort of economic or financial crisis somewhere, it plunges into the 60 US cent level.
Right now, we’re at that 60-cent level…but there’s no obvious crisis or crash to blame for it.
Part of the answer lies in China, our principal trading partner and therefore a key driver of our exchange rate. While the Chinese economy may be struggling and sputtering, it isn’t in the grip of a major financial crisis. Neither is anywhere else. And yet, our Aussie dollar is scraping the barrel.
My point is that it’s due for a turnaround. And there are catalysts to point to which could cause that turnaround in 2025.
Trump will attempt to crush the US dollar
The value of the US dollar has an impact on the price of everything. It is the global money. So, when it is expensive, this constrains trade flows and the value of assets on financial markets.
Right now, the US dollar index is very high. One way in which Trump can trigger a new boom in investment prices and the economy is to devalue it. This would suit other trading nations like Japan and European countries too, by greasing the wheels of trade.
Although devaluing the US dollar should mean a rising gold price, it also means a rising Aussie dollar. And that would be bad news for Aussie gold investors.
How the two balance out is anyone’s guess. The Aussie dollar certainly has room to rise a lot from here. But so does the gold price. Gold priced in Aussie dollars could still be a winner in 2025, again. But it’s unlikely to go up by as much with the currency acting as a headwind instead of a tailwind.
And so my advice to Aussie gold investors is that it’s time to add some leverage to the gold price. By speculating in gold stocks, they can potentially turn gold’s rising US dollar price into outsized profits that shake off any exchange rate move against you.
Gold stocks are undervalued and unloved
While the gold price had a great 2024, gold stocks did not. In fact, they’ve underperformed the yellow metal itself. Mining.com had the stats:
‘As gold soared 27.2% last year, the leading GDX major-gold-stock ETF clocked in at merely 9.4% gains! That made for terrible 0.3x leverage to gold, compared to GDX’s historical range running between 2x to 3x.’
In other words, gold stocks should double or triple your returns in gold. That should be more than enough to offset any rising Aussie dollar in 2025.
Of course, there are no guarantees here. Gold stocks are some of the riskiest and most volatile on the market, so you need to go in with your eyes wide open.
The underperformance of gold stocks in 2024 generated this awkward factoid:
‘Last year major gold stocks were trading at 2020 levels, when gold again averaged $1,773. Gold-stock prices should be much higher with $2,391 gold across 2024.’
Buying gold stocks at 2020 levels when the gold price has since surged sounds like a bargain. And it is. But it’s not quite that simple. Because a lot of other things have happened since 2020. The pandemic and inflation disrupted gold mining more than most.
However, 2025 is unlikely to feature a repeat of that sequence of events…
Instead, this is likely to be a more typical gold bull market. One driven by the devaluation of the US dollar, which should encourage gold mining and miners to finally catch up to the gold price.
Gold stocks should prove to be the place to be in 2025.
The big remaining question is, which stocks have the potential to harness gold’s higher prices to deliver shareholder returns? Find out, here.
Regards,
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Nick Hubble,
Editor, Strategic Intelligence Australia
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