Gold Investor - SPDR Gold Shares

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Appendix II: Mechanics of a foreignexchangehedgeChart 17 provides an illustrated and simplified example of howa foreign-exchange hedge works from the perspective of aUS investor buying Russian stocks. It is worth noting that inaddition to the cost of the hedge, no foreign-exchange hedgecan perfectly eliminate risk. This is because a perfect hedgewould need perfect foresight, as only the initial amount can behedged with certainty. Any subsequent gains will be subject toexchange-rate fluctuations. Conversely, a loss on the positionwill mean that the position has been over-hedged.Chart 17: Mechanics of a foreign exchange hedge – gains and losses on a Russian rouble stock purchasefrom a US$ perspectiveUnhedgedCostless hedgeHedge with costUS$1,000,000-US$212,500US$787,500US$1,000,000-US$212,500US$787,500US$1,000,000-US$212,500US$787,500R30 / US$1-33%R40 / US$1R30 / US$1-33%R40 / US$1R30 / US$1-33%R40 / US$1R30,000,000+1,500,000R31,500,000R30,000,000+1,500,000R31,500,000R30,000,000+1,500,000R31,500,000Buy stock+5%Sell stockBuy stock+5%Sell stockBuy stock+5%Sell stockBorrowR30,000,000Pay 0% rateRepayR30,000,000BorrowR30,000,000Pay 7% rateRepayR32,100,000+US$250,000+US$207,500Convert toUS$1,000,000Rec 0% rateConvertUS$750,000Convert toUS$1,000,000Rec 1% rateConvertUS$802,500Net gain/loss: -US$212,500Net gain/loss: +US$37,500Net gain/loss: -US$5,000R = Russian rouble.Source: Bloomberg, Thomson Reuters, World Gold CouncilGold Investor | Risk management and capital preservation
Currency-hedged index constructionDue to data limitations in the MSCI Emerging Market Index,we constructed a proprietary index to determine currencyperformance, index performance and cost of hedging. Ourmonthly-frequency data series runs from December 1987 toOctober 2012.The currency and cost indices (conversely a return index) arebuilt bottom-up using MSCI Index methodology. 30 Chart 18shows monthly-return performance of the MSCI EmergingMarkets Currency Index and the World Gold Councilconstructedproxy used in our analysis.Chart 18: MSCI vs constructed emerging-market currency indexMoM % change6420-2-4-6-8-101988 1992 1996 2000 2004 2008 2012World Gold Council EM currency index MSCI EM currency indexSource: Thomson Reuters, World Gold Council30 MSCI Hedged, FX Hedge and Global Currency Index Methodology.38_39
Page 6 and 7: Macroeconomic events: support andch
Page 8 and 9: In US dollar terms, prices fell dur
Page 10 and 11: Volatility: low levels belie nervou
Page 12 and 13: The interaction of all assets on av
Page 14 and 15: • Strong global equity market per
Page 16: • The Fed’s preferred measure o
Page 20 and 21: The impact of foreign-exchange expo
Page 23 and 24: Chart 4: Emerging market equity cor
Page 25 and 26: Chart 6: The expected loss from hed
Page 27 and 28: Chart 8: Regional distribution of g
Page 29 and 30: Chart 9: Gold consumption per capit
Page 31 and 32: Chart 11: Performance of emerging-m
Page 33 and 34: The second period, between 2002 and
Page 35 and 36: Table 3: Summary of portfolio perfo
Page 37 and 38: ConclusionExchange-rate risk is a s
Page 39: Gold is also used to lower the cost
Page 43 and 44: III: Tail-risk hedging:an internati
Page 45 and 46: Unlike other assets, gold tends to
Page 47 and 48: Chart 3: Research findings for opti
Page 49 and 50: Chart 5: Improvement in performance
Page 51 and 52: Chart 6: Performance of portfolio a
Page 53 and 54: The role of gold during possible fu
Page 55 and 56: ConclusionGold helps investors dive
Page 57 and 58: IV: Foreign-reserve diversification
Page 59 and 60: Optimal allocations to goldMethodol
Page 61 and 62: Chart 1: US dollar as numéraire -
Page 64 and 65: ConclusionGold should form an integ
Page 66 and 67: DisclaimersThis report is published
Page 68: World Gold Council10 Old Bailey, Lo

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