What will happen to the price of gold?
It will go up if it goes up. It will go down if it goes down. It will stay the same if it does neither. Now you know. History is not much help either. Up and down don’t mean the same thing everywhere.
In American dollars, gold peaked in mid 2011 at about $1,890. In January 2016 it is down a little over 40%. Over the same period, in Canada it is down 16%. In India down 14%. In Yuan down 40%. In Yen down 10%. There are other extremes too. In Rubles, gold is up 50% and in South African Rand up nearly 30%.
So what is the value of gold?
There is no obvious answer that does not include a decision about the relative value of your particular currency. If I bought gold in 2011 with rubles, I would now be pretty happy I had done so. If I had bought it in $US, not so much.
There is a message here. Value is more complicated than a single number.
It is unwise to judge value quickly and with few metrics. Judging is easy. Thinking is hard. That is why judging is so much more common and so often wrong.
When assessing your portfolio, it is important to recognize what it is for. If it is for retirement, the decision about what currency should matter. If you live part of the year in Canada and part in the US, it would make some sense to take out the currency risk by having a proportional share of your portfolio generating $US.
If you are looking at the absolute dollar value of your portfolio, try to understand how the currency issue changed it. The Canadian dollar as an example is down about 40% from its recent best relative value to the $US. If I had purchased a US dollar denominated portfolio 5 years ago, I would be up about 40% even if the underlying securities were unchanged when observed from New York.
A similar situation arose in the late 1980s when translating Japanese stock values to American. Up 80% in dollars equated to up 6% in Yen. Flocking into an up 80% fund turned disastrous in the early 90s.
Should I expect to make 40% over the next 5 years if the American stocks stay flat in US dollars. Certainly, as long as I believe the Canadian dollar will be less than 45 cents US.
Unless you are a bit sensitive to currency value, you can be easily mislead by looking at a single number like percentage change. Moving to a fund that has done well in your currency is wrong. Given that many international and country specific funds are available, failing to pay attention means it is just a matter of time until you get severely burned.
It is about what do numbers mean. A little depth of knowledge can go a long way.
Don Shaughnessy is a retired partner in an international public accounting firm and is now with The Protectors Group, a large personal insurance, employee benefits and investment agency in Peterborough Ontario.