Gold in Non-Dollar Terms

International gold trade is increasingly conducted in currencies other than the U.S. dollar, even though gold in dollar terms remains the most dominant. Shifting prominence among the world’s major players is behind the trend. For example, China is both the world’s largest producer and consumer of gold on an annual basis, and looks to the Japanese yen for an international price benchmark in gold.

Politically, monetary polices of the United States, Europe and Japan all affect the demand for gold, depending on the currency lens. The strengthening of both the U.S. dollar and Euro since gold hit its all-time high in 2011 sent gold prices down 37 percent in dollar terms and 35% in Euro terms just two years later. Meanwhile, the Bank of Japan has accommodating monetary policies in places, which weakens the currency but creates a bullish environment for gold priced in yen. Since the high in 2011, the price of gold in yen terms fell just 15 percent to the bottom in 2013.

How To Trade Gold in Euros or Yen with Futures Spreads

Take a cue from internationally savvy gold traders and use futures to hold your position in gold in a currency other than the U.S. dollar. It’s as easy as placing a spread trade—and comes with potential margin benefits as well! Ask your broker about the spread credits that may be available with the trade you’d like to do.

Taking a long gold futures position is the first leg of your  non-dollar gold trade. To add the currency aspect to the  trade, you take a short position in a currency futures contract as the second leg. Now, you have removed the U.S. dollar from the gold-price equation and added exposure to your currency of choice.

Calculating How Many Contracts to Spread

To ensure you’ve got a gold position in non-dollar terms vs. some gold exposure PLUS a currency position, it’s important to calculate the spread ratio between the value of the contracts. You want those contract values on each side of your spread to be as equal as possible to eliminate excess currency exposure.

As you can see, the gold and Japanese yen futures contracts had very similar values, so could be spread on a 1:1 basis, i.e., long 1 gold contract and short 1 yen contract.

However, that same ratio between gold and Euros would be outof whack by about 30% and introduce far more Euro exposure than what you’re looking for in your gold-in-Euro position. Here’s where calculating the spread ratio between the two contracts comes into play.

To calculate the spread ratio, first make sure the gold and currency contract values are in the same currency—like shown in the previous tables. Then, divide the larger value by the smaller value to get the spread ratio, i.e., the number of smaller-value contracts you need for each larger-value contract.

Turning a Spread Ratio into A Futures Position

Now that you know you need 1.29 gold futures contracts to equal the value of 1 Euro FX futures contract, you can even out the exposure.

Simply increase the number of contracts you trade on both sides of the spread until the contract values are about equal. In this case, that would mean being long four gold futures contracts and short three Euro FX contracts.

Trading Gold in Japanese Yen with Futures

Here’s an example of how the math works when you use gold and Japanese yen futures to act on your market opinion that gold is bullish in yen terms.

In late November, you decide that gold is bullish when quoted in Japanese yen. Noting that the notional futures contract values are almost equal, you buy one gold futures contract and sell one Japanese yen futures contract. A month later, when you decide to exit the position by reversing the trades, the price of gold in dollars has fallen $27.60, for a trading loss of $2,760. Meanwhile, the Japanese yen also has fallen in value, and you make $4,375 on that side of the spread, for a total profit of $1,615.