Gold in your portfolio? Here's what you need to know about currency hedging

Gold has long been a cornerstone of diversified portfolios, particularly during times of geopolitical uncertainty or economic stress.

As global markets grapple with volatility in 2025, it's no surprise that investors are turning to gold once again in search of stability.

But as interest in gold grows, investors are also thinking more critically about how they gain exposure to it.

Currency risk

For Australian investors in particular, that conversation increasingly centers on currency risk.

Because gold is priced internationally in US dollars, buying gold from Australia also means taking on exposure to the AUD/USD exchange rate.

In recent years, a falling Australian dollar - down to around US62-63 cents by late 2024 - has amplified the returns of unhedged gold investments.

However, that tailwind may be fading.

After a prolonged slide, it does appear that the local currency may have bottomed out, with signs pointing to a potential rebound in the months ahead.

If the AUD does strengthen from here, it could chip away at future gains for unhedged gold investors - prompting some to consider whether a currency-hedged approach might now make more sense.

Hedging your bets

But does hedging FX risk always make sense when investing in gold? The answer, as is often the case in investing, depends on the goal.

At its core, currency hedging aims to strip out the noise of foreign exchange movements, giving investors more "pure" exposure to the underlying asset - in this case, gold. This can be especially valuable during periods of AUD volatility or when US dollar weakness threatens to dilute returns.

Over the past 20 years, the AUD/USD exchange rate has shown a modest positive correlation with the gold price.

In practical terms, this means that the Australian dollar tends to rise when gold does, which can offset gains for local investors holding unhedged gold. Currency hedging addresses this by locking in the current exchange rate, allowing gold's performance in USD terms to flow directly through to AUD returns.

Moreover, historical analysis shows that hedged gold has tended to outperform unhedged gold in the years following US Federal Reserve rate cut cycles.

This is likely due to the Australian dollar strengthening during global recoveries - reflecting its status as an economy-sensitive, commodity-linked currency. In such periods, hedging FX exposure can help preserve the gains generated by gold's rally.

Portfolio position

That said, hedging is not without trade-offs.

Unhedged gold has long served a dual purpose in portfolios - not only as a store of value, but also as a crisis hedge.

During market downturns or periods of heightened geopolitical risk, both gold and the US dollar tend to strengthen.

This means that unhedged gold, which includes USD exposure, can amplify defensive characteristics just when they're needed most.

There's also the issue of long-term diversification.

While hedged gold can be effective for short- to medium-term tactical positioning, unhedged gold's additional currency component has historically helped balance portfolios across different macroeconomic regimes-particularly during global stress events when both gold and the USD have acted as safe havens.

Put simply, if an investor's primary goal is capital preservation during crisis periods, unhedged gold continues to offer compelling value.

Exposure to gold

In today's environment - marked by diverging central bank paths, persistent inflation, and uncertainty around global growth - investors are increasingly looking for ways to fine-tune their exposures. Currency-hedged gold offers a way to do that, particularly for those with shorter time horizons, or who are seeking to tactically trade gold's price movements without FX distortion.

Luckily, Australian investors have the flexibility to choose between both hedged and unhedged gold exposures on the ASX.

With gold near record highs, the Australian dollar at a potential turning point, and economic uncertainty still unfolding, this is an opportune moment for investors to take a more considered approach to portfolio construction.

Thoughtful allocation - not just to gold, but to the type of gold exposure - can make a meaningful difference in navigating the road ahead.

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