Canadian gold stocks have been selling off. The companies that tend to run non-hedged books being hit the hardest—e.g. Goldcorp. Barrick, a company that tends to hedge production, has also been hit… although not to the same extent.

Interestingly, in the short run, hedged versus non-hedged books may take a back seat to the currency issues surrounding a Canadian gold miner selling a product priced in US dollars. And in fact, that may have a lot to do with the perception of where gold prices are going… short and long term.

Gold has been drifting lower in recent weeks, almost in lockstep with the US dollar, which has caught Canadian gold buffs off guard. As any good Canadian gold buff will tell you, gold typically rises when the US dollar weakens.

So what’s happening?

It may be a case of Canadian gold buff myopia. Canadians - gold buffs included - have been particularly sensitive to the greenback/loonie exchange rate. New 27-year highs on the loonie was headline news this week.

Not so on the world stage. The US greenback has weakened against major currencies like the yen and Euro, but not to the extent that we have seen in Canada. I suspect that gold is reacting to the performance of the US greenback versus the major global currencies and not at all focused on the US$/Cdn$ exchange rate.

This has implications for Canadian gold mining companies. For some perspective, look at the accompanying chart that compares the year-to-date performance of gold bullion in US$ versus its performance in Canadian$.

Bottom line, gold has gone up in US dollars, but has actually declined in Canadian dollars. For Canadian gold stocks, it is the price in Canadian dollars that affects their bottom line.

Because I do not foresee any dramatic slowdown in the US economy, any turnaround in the price of gold, will be the result of a weaker Canadian dollar. In other words, a decline in the loonie/greenback exchange rate will see a pick up in the price of gold when translated back into Cdn$.

So what about the loonie?

The loonie has been on a serious run and technically speaking, may be due for a minor correction. Taking it below 90 cents US would do wonders for gold stocks.

FYI, I have been purchasing Goldcorp and Barrick in my income pool, and using them as part of my covered call writing program. Decent premiums on the options and what may be a bottoming in their price.