Gold quoted in currencies other than the dollar

Why a gold cross exists at all 

The international reference price for gold is quoted in US dollars per troy ounce, and that convention is a matter of market history rather than of the metal. Most of the people who buy, sell, mine, fabricate and hold gold do not measure their affairs in dollars. A jeweller in Europe pays wages in euros, a mining company in Australia pays its costs in Australian dollars, a Japanese fund reports in yen, and a Swiss refinery finances its inventory in francs. For each of them the dollar price answers only half the question, because the money they will actually receive or pay depends equally on where their own currency stands against the dollar.

A gold cross closes that gap by expressing the metal directly in the currency that matters to the holder. The catalog carries XAU/EUR, XAU/GBP, XAU/AUD, XAU/JPY and XAU/CHF alongside XAU/USD, and silver appears in the same form as XAG/EUR. The reading convention is the currency pair convention rather than a commodity one: the first element is what is being priced, and the second is the currency it is priced in, so XAU/EUR states how many euros one troy ounce of gold costs.

The arithmetic that produces the quote 

A gold cross is not independently discovered. It is derived, in the same way any currency cross is derived, from the dollar price of the metal and the dollar exchange rate of the second currency. There is no separate pool of buyers setting a euro gold price in isolation; there is one gold market, one euro market, and an identity connecting them that arbitrage keeps tight. The direction of the division depends on how the currency pair itself is quoted, which is the detail most often reversed.

Decomposing a move into metal and currency 

Because the quote is a quotient of two market prices, a change in it has two possible sources and the number alone does not distinguish them. Gold in euros can rise because gold rose, because the euro fell, or because both happened in some combination, and it can be flat while both underlying markets moved a great deal in offsetting directions. Reading a gold cross as a statement about gold is the standing error, and the decomposition below is the whole remedy.

The example is the ordinary case rather than a contrived one. Gold rose by a visible amount measured in dollars and fell measured in euros, on the same day, because the currency moved further than the metal. Anyone reporting in euros experienced a loss on a holding that a dollar based commentary described as a gain, and both descriptions are accurate in their own unit. The shortcut of subtracting the currency change from the metal change is close enough for most purposes, and the residue between the shortcut and the exact division grows with the size of the moves.

Who uses these quotes, and why 

• Producers whose costs are in a local currency. An Australian miner pays wages, power and contractors in Australian dollars while selling metal for US dollars, so the gold price expressed in Australian dollars is the price that determines its margin, and it is the series such a producer hedges against.
• Fabricators and jewellers, who buy metal in dollars and sell finished goods in a domestic currency, and whose inventory is exposed to both legs between the two dates.
• Funds and institutions reporting in a currency other than the dollar, for whom the dollar leg is an unintended exposure attached to a metal position rather than a decision taken on its own merits.
• Participants who hold a view about the metal and no view about the dollar, and who use a cross to express one without the other, accepting that they have taken on the second currency in exchange.

The fourth case deserves care, because it is often described as removing the currency exposure and it does not. Trading XAU/EUR replaces an exposure to the dollar with an exposure to the euro. It is a substitution of one currency risk for another, chosen because the second is the unit the holder already lives in, not an elimination of currency risk from the position.

What the Gulf pegs mean for this 

Several Gulf currencies, including the United Arab Emirates dirham and the Saudi riyal, are maintained at a fixed rate against the US dollar by their monetary authorities rather than floating against it. Where that arrangement holds, the currency leg of the calculation above is close to constant, so the price of gold measured in the local currency moves almost entirely with the dollar price of the metal, and the second source of variation that a euro or yen based holder faces is largely absent.

Two qualifications belong with that statement. A peg is a policy commitment maintained by an authority, not a law of nature, and it is maintained by that authority intervening in the market and by aligning domestic policy with the anchor currency, so the correct description is that the currency leg is stable while the arrangement is maintained. And local retail prices in the Gulf are quoted per gram at a stated purity with a making charge attached, so a shop price differs from the screen price for reasons that have nothing to do with the exchange rate at all.

How a CFD on a gold cross settles 

A contract for difference on a gold cross references the derived price and settles in cash, exactly as one on XAU/USD does. The difference between the opening and closing price is multiplied by the number of troy ounces the contract covers, and the result is expressed in the quote currency of the instrument, which is euros for XAU/EUR and yen for XAU/JPY. Where the account is denominated in a different currency again, that result is converted at the prevailing rate, and the conversion is a third exposure that the position carries without naming it.

Two practical differences from the dollar quote follow from the derivation. Quoted spreads on a cross are generally wider than on XAU/USD, because the price is maintained from two markets rather than one and the dealer carries both. And the daily financing adjustment reflects the currencies involved as well as the cost of carrying the metal, so it is not the same figure as on the dollar quote of the same metal. Profit and loss is calculated on the full notional value while only a percentage is posted as margin, so an adverse move is measured against the whole contract and a loss can exhaust the margin posted rather than being limited to it, with a favourable move measured on identical terms.