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Intermediate · Lesson 5 of 5Currencies and gold
The Australian dollar is often called a "risk currency": it tends to fall when global markets are fearful and commodity prices drop, and to rise in booms. That gives unhedged global shares a natural cushion for Australian investors in crises.
Exchange rates are driven by interest rate differences, trade (Australia's commodity exports), capital flows and risk appetite. Forecasting them reliably is very hard.
Gold pays no income. Its price has been linked to real interest rates (lower real rates tend to support gold), central bank buying and crisis demand. Investors use gold as a diversifier; size it modestly because it can go long periods without gains.
Key takeaways
- AUD tends to fall in global sell-offs, cushioning unhedged global shares.
- Exchange rates are hard to forecast.
- Gold is linked to real rates and crisis demand; it pays no income.
Check your understanding
1. In a global crash the AUD usually...
- Rises sharply
- Falls
- Is fixed
- Has no pattern at all
Show the answer
Falls. It behaves as a risk-sensitive currency.
2. Gold has tended to do better when real interest rates...
- Rise
- Fall
- Are high and rising
- Do not matter
Show the answer
Fall. Lower real yields reduce the cost of holding a non-yielding asset.
Go deeper
- Wikipedia: Australian dollar
- YouTube videos: what drives gold prices and currencies
- Investopedia: gold investing
- Wikipedia: Gold as an investment
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