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Capital Markets

Foreign exchange: Gold evolves as a currency

Seen as hedge to currency debasement; Integrated FX and metals pricing adds advantage

The gold price stormed through $1,500 a troy ounce last month after Standard & Poor’s warned that it might cut the US’s triple-A rating, and investors priced in the potential for a downgrade of the monetary base, in US dollar terms. In this year’s Euromoney FX survey, respondents were asked: Is gold just another currency? Thirty-four percent said ‘yes’, 42% said ‘no’, and 24% said they did not know. So it is fair to say that opinion was mixed.

However, banks with integrated FX and metals trading businesses have never been surer that gold is becoming more and more like a currency. "Gold and silver trade very much like currencies," says Chris Vogelgesang, co-head of global foreign exchange at UBS.

Negative carry

He claims that the bank’s integrated trading platform has given it a head start in the rising popularity of dual currency and metals structured products, such as warrants, which it distributes through its wealth management and retail networks. Moreover, gold has become a much easier tool to trade because of the prolonged period of low interest rates. In the past, one of the impediments to trading gold had been the negative carry associated with owning the metal.

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