Tuesday, June 26, 2007

The Canadian Dollar and Gold Stocks

I find this next chart really interesting because it shows that it is indeed important to look at the currency market when you are trading gold stocks. Many people hold gold stocks that are traded on both American and Canadian stock exchanges, and some people may wonder if there is any advantage in holding a gold stock on a particular exchange. Would it be better to trade Yamana on Toronto or New York, for example.

With the Canadian Dollar showing so much strength lately, one might expect that holding stocks denominated in Canadian Dollars would be the better choice. However, as the chart below will show, this is not the case.

The top section of the chart above shows XGD divided by GDX. The first symbol, XGD, is a gold stocks ETF that trades in Toronto. The second, GDX, is an American gold stocks ETF, denominated in US Dollars. When the ratio line above is decreasing, it means that GDX is doing better than XGD, and when it is rising XGD is outperforming.

The second section of the chart has nothing really to do with gold stocks, and is a chart of the Canadian Dollar. Even though the 2 charts seem like they would have nothing in common, as you can see, both charts are mirror images of each other.

What is going on here is that when the Canadian Dollar is rising, American gold stocks have to rise faster in order to keep valuations in line with their northern counterparts. For example, if Yamana in Toronto rises by 1%, and the Canadian Dollar rises by 1%, Yamana trading in New York must rise by 2%.

Therefore, whether you hold your gold stock on an American Exchange or Canadian one, I don't think you will have any advantage either way.

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