What Explains the Aussie Dollar’s Rapid Rise?Written on 23 April 2011 by Kris SayceIn this week’s Money Weekend: G7 bailout continues to boost Aussie dollar… Aussie dollar keeps running… Buy gold stocks now… Bullion buying is easy… Risk taking is at a high…
There’s no other way to describe it. The Aussie dollar has gone ballistic.
Since the G7 bailout of the foreign currency markets in March, the Aussie dollar has gained 9%:
Wednesday’s The Age reported:
“After punching through the 106 US-cent mark yesterday the Australian dollar barely stopped for breath on its way to another record early today when it climbed past 107 US cents – and kept going.”
The paper quoted Thomas Averill, managing director at Rochford Capital:
“It’s not just increased risk appetite, it’s a general aversion to holding US dollars at the moment which looks set to continue in the medium term.”
Over at Bloomberg News, Kurt Magnus, executive director at Nomura Holdings said:
“The U.S. dollar is in a new trend lower. Fund managers are actively shifting toward liquid, growth currencies like the euro and Aussie.”
For more thoughts on the Aussie dollar’s latest move, click here to see a free video market update from Murray Dawes over at the Slipstream Trader YouTube channel.
Aussie dollar run not over yet
Of course, Diggers & Drillers editor, Dr. Alex Cowie has also given his opinion on the moves in the Aussie dollar. Three weeks ago he wrote:
“So it’s no surprise the Aussie dollar is now on fire. It hit 1.037 against the US last night. My money is on this being the next leg up for the Aussie (time for you to think about that trip to Bali later in the year). It’ll bang its head against 1.055 for a bit and then who knows where it will next consolidate? Somewhere in the $1.08-1.15 region by the second half of the year is my wager. Parity is history.”
With the Aussie hitting $1.07 this week, “the second half of the year” could be a losing bet… try the first half of the year!
Dr. Cowie is bullish on the Aussie dollar because he’s bullish on the Aussie commodities market. They go hand in hand.
Having picked the bull run in the copper and tin markets, and getting in quickly with potash stocks, the Stock Doc has put all his energy into silver.
In fact, the Diggers & Drillers portfolio has contained silver since it was trading at USD$15 per ounce back in 2008. But despite the tripling in price since then, the Stock Doc reckons there’s more to come.
Just today he told me:
“I think we are now officially seeing the market waking up to the fact that silver is still hugely undervalued.
“The price may have gone vertical in the last few months, but really it’s just making up for fifteen years of the price doing very little.
“The price is also going vertical because of the insane levels of demand. The fact is that industry is getting through about 55% of mine production, and investors are rushing to take up the rest. Unlike gold however, there’s very little silver bullion sitting around as spare supply. Central banks gave it to industry to use up, as it was worth so little. This now looks like an even more disastrous move than the UK selling half its gold at the bottom of the market!
“Diggers & Drillers has been recommending investing in silver for more than two years, and I hold silver bullion myself. In fact, I bought more this week, and will keep buying as the price goes up as I expect it will go far higher. There’s only one problem my plan – it’s in such short supply that it’s hard to find!”Gold stocks are still a buy
The Stock Doc is bullish on gold too. So bullish, he’s looking to add another gold stock to the Diggers & Drillers portfolio this month. He’s already got five gold stocks on the books, but given his view he’s keen to add more.
If you’d like to find out Dr. Cowie’s stock picks, including his latest pick when it’s released, click here for more details.
The Stock Doc isn’t the only one tucking into precious metals. Sound Money. Sound Investments editor, Greg Canavan wrote the following in June last year:
“Last week we showed you how silver had become systematically de-monetised by governments over the past 150 years or so. These actions have seen the gold/silver ratio move from its long term historical average of around 15:1 to 66:1 today. In other words, one ounce of gold is now equivalent to 66 ounces of silver.”
He went on to write:
“In this week’s essay, we’ll show you why silver could potentially be one of the cheapest assets in the world right now. The silver market is not at all analysed by mainstream investors and for this reason remains very much overlooked as an investment opportunity.”
That was nine months ago. Today, the gold/silver ratio is 34:1. And the price of silver per troy ounce has increased from about USD$17 to the current price of USD$45.
This week Reuters reported:
“Bullion powered to a lifetime high for a fifth consecutive session on Thursday on a sharply weaker dollar, while lingering tensions in the Arab World, worries about the euro zone crisis and U.S. fiscal health offered additional support.”
But doesn’t all this mean gold and silver are in a bubble?
Buying bullion
If you look at the charts, it’s an easy conclusion to come to. Personally, we don’t believe it is. Besides, if you’re investing in gold with just a portion of your portfolio, and you don’t use leverage – which is the case for most bullion buyers – holding gold shouldn’t give you too many sleepless nights.
In fact, like the Stock Doc, your editor bought more bullion this week. We dropped into a bullion dealer in the Melbourne CBD this week to increase our portfolio exposure to about 25% precious metals.
It’s always a nice feeling holding onto the shiny metal before handing it back for them to lock in a secure vault. Although if you’ve got secure facilities to store it at home we’d recommend you do that, the key is to make sure it’s secure.
But here’s the thing. We dropped in there on Wednesday lunchtime… along with three other people. If the length of queues is a guide of anything, it’s certainly not pointing to a gold bubble.
Looking at Greg Canavan’s recommended portfolio weightings, he suggests a big exposure to precious metals and precious metal stocks too. To find out Greg’s ideal weightings and which gold stocks he’s recommending right now, click here for more details.
So, what’s driving the move in gold and the Aussie dollar?
It’s all about risk
There are a few theories. One of the more wishful theories is that the Aussie dollar is becoming reserve currency as central bankers hedge their exposure to the US dollar.
The reality is the opposite.
Investors are convinced the global economic recovery is in full flow. That consumers worldwide are spending, that the Chinese economy will continue to grow, and therefore the demand for raw materials will increase…
Hence, investors are piling into the Aussie dollar to punt on it going higher, and so they can buy Australian resources stocks.
That tells you investors are happy taking on risky positions… just as they were happy to take risky punts on the resources sector from 2003 to 2008. A five-year period that coincided with one of the biggest resources bull runs in history.
But what happened next?
That’s right, when investors got nervous, and the economy turned south, the Aussie dollar soon lost favour with investors.
You can see the impact on the Aussie dollar on the chart below. The Aussie dollar is the blue line:
As you can see, the Aussie dollar collapsed.
But the chart also shows you why I’m quite happy holding gold. Gold is often seen as a hedge against inflation or political risk.
But you can also say that gold is a hedge against a falling Aussie dollar. You’ll notice on the chart below that when the Aussie fell from late 2008, the price of gold in Aussie dollars increased:
Ed note: This price chart is the GOLD exchange traded fund which trades at one-tenth the price of gold]
Then, as the Aussie dollar climbed in 2009, the price of gold in Aussie dollars dropped.
But during the recent move in the Aussie dollar, starting early last year, the price of gold in Aussie dollars has been fairly constant.
In a nutshell – as I’ve written before – don’t expect to make a fortune from gold in the short term. But when the second great modern resources boom ends, and investors lose interest in the Aussie dollar again, holding gold in your portfolio should be a good way to protect your wealth.
Cheers.
Kris.
