Dennis Gartman, like half of the world right now, is a big proponent of gold.
Except that instead of buying gold in dollars, Gartman prefers going long in foreign currencies. Here’s how he does it. And no, it’s not through a gold Bentley purchase program:
The Gartman Letter: To that end, we are asked “How do we get long of gold in foreign currency terms?” We’ve had the question asked so often that we thought it wise to explain it here this morning. Simply put, there are any number of ways to be long of gold, all of which carry an implicit dollar exposure. One can buy gold futures or one can buy the gold ETF. We are ambivalent to either, for the “arb” between the two does keep them almost perfectly in line, one with the other. The “beauty” of the ETF, however, is that one can adjust the long position in dollar terms perfectly, where as the gold future, being 100 ounces of gold, carries a rather sizeable exposure. Thus, at present, one contact of February gold is “worth” approximately $113,000, or one can create the same value by owning $113,000 “worth” of the ETF, or at last night’s close 1017 shares.
The real problem here is creating an equal dollar sum on the other side of the transaction. One can hedge away the dollar risk of a long gold transaction by selling the spot FX market and then rolling the position forward each day, which is cumbersome but quite effective, or one can sell short EUR, or Sterling, or Yen futures on the IMM, which is easy but creates dollar valuation problems, or one sell short the currency ETFs (FXE, FXB or FXY for the EUR, Sterling and the Yen respectively), which makes dollar equivalence very easy but borrowing these ETFs can prove problematic. The easiest way, for the public anyway, is to use the IMM futures.
The problem with the IMM futures is that they are for fixed sums of each currency. For the EUR that is 125,000 EURs, which at the moment, given the spot rate is “worth” approximately $180,000; for Sterling, which is 62,500 pounds, that is approximately $101,400, and for Yen (1.25 million Yen) that is approximately $111,250. Thus, if we buy one futures contract of gold and were to sell one EUR future, we’d have an excess long dollar position of approximately $67,000, which can be “hedged” away by owning a bit more GLD. One gold future is almost perfectly equal to One Yen future but it is worth a bit more than that of one gold future, and one Sterling future is worth a bit less. Thus, if one “did” one contract each of Sterling, the EUR and the Yen, and one did three contracts of gold, one’s dollar risk would be approximately $54,000 (rounded off to the nearest thousand dollars), which could itself be hedged away by buying that much more GLD.
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