Posts Tagged ‘AUD’

Is there any benefit for Aussies to invest in gold?

Tuesday, November 16th, 2010

Recently, one of our readers who bought How to buy and invest in physical gold and silver bullion wrote to us,

I live in Perth so am looking to buy bullion from the mint, just down the road, literally, however I?m concerned about how the fluctuating US dollar affects my investment. Surely during hyperinflation of the US dollar gold will obviously go up, but also the Aussie dollar will strengthen significantly at the same time. If the Aussie dollar goes up more than the gold price, I actually loose money in Aussie dollars for which i use to pay my gold (If I use us money trading account…i will loose money when i finally exchange us to aus $$ if the exchange rate is super high)…is this a realistic situation or in a case of hyperinflation, is gold likely to spiral upwards whereas the Aussie dollar marginally increase in relation to the US$…….i.e will the spiralling gold price and hyperinflation in the states cause equivalent hyperinflation worldwide and therefore maintain the “approx” AU/US $$ exchange rate.? I can see gold skyrocketing but if the Aussie dollar also sky rockets also…this is of no benefit is it>>> or is it???

our dollar is very strong at the moment and predicted to get stronger, hence, i will loose money by investing in gold or silver, but i have no trust in the US financial system. Is there a way i can hedge myself against a strengthening Aussie dollar??

I realise u don’t have a crystal ball…I’m not holding you to anything i just want your opinion.

As we can all see, currently there?s a correlation between Australian dollars (AUD) and gold price. Hence, from the point of view of Australian investors of gold, a rising gold price (in USD) does not benefit them. We see that correlation working out in 2007 and today. Today, even though gold prices had hit a record high in USD terms, it is still below the record high in AUD terms- gold hit a record high of around AU$1500 in 2009 when the AUD was very ?weak?.

To answer our reader?s question, we have two points to make:

Back to the basics?

First, let?s revisit the basics. As we wrote in How to buy and invest in physical gold and silver bullion, when we invest in gold, we are not so much into ?making? money. We are doing so to hedge and protect our existing wealth. In other words, gold is not so much of an investment. Instead, it is more of an insurance policy. Therefore, we wouldn?t be so concerned if our ?investment? in gold is not turning out well in terms of AUD. However, what we are more concerned is the possibility of an AUD currency crisis. We have written about that in Will there be an AUD currency crisis?. We are not saying it will happen. Instead, we are suggesting that there?s a possibility that it may happen and by ?investing? in gold, we are hedging ourselves against that.

USD the reserve currency

Regarding the mess in the US financial system, it would be quite an entertaining spectacle if the US is just an inconsequential banana republic like Zimbabwe (which incidentally fell into hyperinflation- a object lesson for the US to learn). In that case, the case for ?investing? in gold will be much weaker.

Unfortunately, the US is not an inconsequential banana republic. It is a superpower whose currency is the world reserve currency. As we wrote in How to buy and invest in physical gold and silver bullion,

The United States, with ?helicopter? Ben Bernanke at the helm of the Federal Reserve, is committed to money printing to solve America?s economic woes. To the extent that the US dollar is the world reserve currency, it will affect the rest of the world.

Because it is the world?s reserve currency, China ?saved? most of the fruits of its hard work in the form of that reserve currency (a cool US$2 trillion worth). Same thing for Japan. Ditto for many other countries.

By printing money, the US is devaluing the world?s reserve currency. But the world cannot afford to have its reserve currency devalued towards the value of confetti. As we wrote in Why did the foreigners bail out cash-starved financial institutions?,

China?s trillions of US dollars reserve is a form of savings that will be used to acquire their future needs for resources to power their economy in the long term. Therefore, any threat to the long-term value of their savings will be a long-term threat to their economy.

So, what is the solution to the devaluation of the reserve currency? As we wrote in What if the US fall into hyperinflation?,


That?s why there?s a threat of a currency war between the US and China right now. The US is accusing the Chinese of manipulating their currency while the Chinese are pissed off with the US for exporting their inflation to China. As the US prints and devalue its reserve currency, China will be hard pressed to devalue theirs too (in the form of a currency peg). If China let their yuan soar in value, their exports will collapse, which will severely affect their economy and social stability. Japan is in the same situation too. A strong yen (relative to the USD) is very bad for their economy too. That’s why Japan recently cut their already super-low interest rates and there’s talk of more money printing on the Japanese’s part.

Now, look at Australia. Let?s imagine that the AUD reaches US$1.20 and is threatening to march forward to $1.40 and beyond. If the AUD gets too strong, it will hurt the Australian economy. In such a situation, Australia will be hard pressed to devalue its currency too (e.g. by cutting interest rates, direct intervention). Or maybe impose capital controls.

In other words, the world is in a situation where there?s a competitive devaluation of currencies. In the recent G-20 summit, countries are pledging not to engage in that. Well, if you doubt their words, then you will sleep better to have your own reserve currency in the form of gold.

In any case, it?s going to be very rough ride in the forex markets. If you are forex speculator, this is heaven. If not, then it is going to suck.

How ‘speculative’ is the AUD (and other currencies)?

Thursday, November 11th, 2010

Recently, we took a look at this report from the Bank for International Settlements (BIS). The average daily foreign exchange turnover (including derivatives) is around US$3.9 trillion. The Australian dollar is the 5th most traded currency (at 7.6% of volume).

So, roughly AU$300 billion of AUD are turned over daily. Of that, US$249 billion of the trade is in the AUD/USD currency pair alone.

Now, let?s take a look at Australia?s balance of payment data. If you take the last 4 quarters of import and export volume, approximately AU$500 billion worth of goods/services are traded in one year.

Compare the amount of AUD that is traded daily in the foreign exchange market and the value of the import/export in one year. What do you see?

Mind you, we are just taking the AUD as an example. The volume of daily turnover in the foreign exchange (for all currencies) far exceeds the value of import/exports. If you look at the report from BIS, between 2004 and 2007, turnover increased by 73%! No wonder forex trading has now become a cottage industry.


Sunday, October 10th, 2010








The next question is: why is the USD depreciating?






But as Murray Rothbard continued,





Thursday, August 12th, 2010





But are we exposed more than we realise?








Marc Faber: Short the AUD

Wednesday, June 16th, 2010

In case you’ve missed it, this is what Marc Faber said in a recent interview:

And as a special tip, I think I would short the Australian dollar, because talking about a housing bubble, Australia has 10 times a bigger bubble than China. In Australia you have what you said we don?t really have in China, namely the low leverage that we have in China, we have the opposite in Australia, very high household leverage. ? So I think a big downfall is about to happen.

The worst case scenario would be a falling AUD in the context of a currency crisis. Our favourite hedge against this will be in gold (see our book, How to buy and invest in physical gold and silver bullion).

Serious vulnerability in the Australian banking system

Sunday, May 23rd, 2010

Last week, we witnessed one of the most rapid falls on the Australian dollar (AUD). In a matter of a couple of weeks, the AUD fell around $0.10 relative to the US dollar (to a low of above US$0.80).

There were many reasons offered for this rapid depreciation- one of them blames the Rudd government?s resource super-profit tax (see Why Rudd?s mining super-profit tax will encourage more commodity speculation). In reality, there?s probably no specific reasons why AUD fell so quickly for this specific instance. As we wrote in our report, How To Foolproof Yourself Against Salesmen & Media Bias, the desire to pin-point a specific reason is part of the human trait of falling for the narrative fallacy. The simplest explanation laid the blame on ?hedge funds? and ?speculators.?

In any case, in the minds of most lay-people, the AUD is seen as a barometer for the health of the Australian economy. If the AUD goes into a free-fall, many people will see it as a sign that the Australian economy is in trouble. Conversely, if the AUD appreciates strongly, it is seen as a sign of a ?strong? economy. In reality, the foundations for the strength/weakness of the economy has been set long before the currency appreciate/depreciate. Nowadays, with the rise of lightening-speed money, the currency exchange rate is more as a result of capital inflows/outflows from money shuffling and less as a result of the fundamentals of the economy.

For Australia, we are getting more and more nervous about a currency crisis someday (see Will there be an AUD currency crisis?). Jimmy Rogers concurs with our worry. As he said in a recent interview,

If the Australian economy keeps taking on debt, the next time there’s a bear market, the Australian dollar will collapse. And he sees a bleak future for any currency backed by massive debts. Top of his list of bad currencies is the once mighty greenback.


The only disappointment I’ve had is that your politicians are as bad as the ones in America. If the Australian government keeps running up such gigantic debts, the lucky country is going to run out of luck.

However, he reiterates his belief Australia will not be prepared for the next economic shock and for a commodities bear market if it keeps taking on debt.

One thing you have to note is that Jimmy Rogers is probably not talking about Australia?s government debt. Relative to basket case countries like US, UK, Japan and the PIIGS in Europe, Australia?s government debt is tiny. The problem for Australia is its private debt, which is reflected in the foreign debt. As long as foreigners wants to invest in Australia, it will be fine. But the moment foreigners change their mind, Australia will be in trouble (a crashing AUD will be one of the symptoms).

We believe Australia has a serious structural problem that can easily turn this lucky country into an unlucky country very quickly. Recently, we saw this presentation (that explains the problem) making its round around web sites:

How to Profit From the Coming Aussie Property Crash (and Banking Crisis)

Please note that we:

  1. Are not making any investment advice based on this presentation.
  2. Are not making any predictions based on this presentation (see Failure to understand Black Swan leads to fallacious thinking to understand what we mean).

There?s one point made in this presentation that we have not covered in this blog- there are AU$13 TRILLION worth of off-balance sheet liabilities in Australia?s banking system (you can see the figure yourself from the link to RBA?s web site). Inquiring minds should be asking questions about what these liabilities are all about. Does the Australian regulators and central bank (and perhaps the banks themselves) fully understand what sort of hidden risks the Australian economy is subjected to from these ?off-balance sheet? liabilities?

For us, the basic point to take away from this presentation is that:

  1. There is a serious vulnerability in Australia?s banking system.
  2. This vulnerability is simply too colossal to be bailed out by the Australian government (hence the threat to the AUD).

We are not trying to scare anyone here. But these are the sorts of questions investors have to ask.

Return (and potential crash) of the great Aussie carry trade

Monday, October 5th, 2009

Since April 2006 to the July 2008, the main narrative for the Aussie dollar is that it was going to reach parity with the US dollar. As you can see from our Market Club chart, during that period of time, the trend of the AUD was up:

USD/AUD trend from October 2004 to October 2009

USD/AUD trend from October 2004 to October 2009

Back then, short-term interest rates in the US was down while in Australia, it was still going up. Then as the Global Financial Crisis (GFC) struck, Australia’s rising interest rates trend was reversed into a hasty cuts by the RBA. That was the period when the AUD fell precipitously in the context of global deflation. Then in the context of “green shoots,” zero short-term American interest rates and the RBA’s hints of more interest rates hikes to come, the AUD returned to an upward trend again.

In a world of plentiful highly portable hot money, interest rates differential is one of the major drivers of such high volatility between currencies. Twelve months ago, as we described in Another complication in RBA?s interest rate cut,

Now, let?s put yourself in the situation of say, a rich Arab investor with plenty of cash (US dollars). Previously, when Australia?s short-term interest rates were high and rising and the Australian dollar was appreciating, it was pretty good to convert your US dollars into Australian dollars and park your money in an Australian term deposits. The biggest risk for you is that the Australian dollar may depreciate, resulting in a loss as measured in terms of US dollars.

Today, we have a rapidly falling Australian dollar and a RBA signalling its intention to cut interest rates. What will you do? Obviously, you will want to pull out your money from Australia as soon as possible. If the other foreigners are thinking the same, you can expert further downward pressure on the Australian dollar, which will increase the pressure for more foreign money to pull out of Australia. This is going to be a problem for Australia.

Today, the situation is reversed. The very same hypothetical Arab investor is going to pump more of his excess zero yielding US dollars into higher yielding Australian dollars. Not only that, zero yielding US dollars will tempt many money shufflers to borrow money for free in the US to be ‘invested’ in Australia. The RBA’s threats to raise interest rates are sure to tempt even more hot money to flow in. As the AUD rose further, it made this carry yet even more profitable, which further lured in more hot money, which in turned caused the AUD to appreciate even more. Some of these hot money is sure to find its way into the Australian stock markets (instead of the safer high yield cash deposits). The formula looks pretty simple:

  1. Borrow money for free in the US, courtesy of Ben Bernanke.
  2. Buy AUD to be ‘invested’ in Australia (i.e. short the US dollar).
  3. If you are more risk adverse, put the AUD into government guaranteed term deposits, courtesy of the Australian tax-payers.
  4. If you enjoy risk taking, punt on the Australian stock exchange and/or capital raisings.
  5. Watch you wealth grows as the AUD appreciate and Australian stock prices trend up. With the RBA expected to raise interest rates, watch in glee as your potential returns increases.
  6. At the first sign of trouble, (1) liquidate your Australian stocks and pull out all your government guaranteed term deposits immediately, (2) sell the AUD to buy back the USD, (3) repay the free money borrowed from Ben Bernanke, (4) pocket your easy profits and (5) retire in Bahamas, thanks to the American and Australian tax-payers.

If you are a small investor, take note of step 6. At first sign of trouble, you can expect the AUD to fall sharply. In fact, judging from the recent tiny rebound in the USD (and fall in the AUD), some of these hot money are already executing point 6.

If this trend reversal becomes entrenched, we can expect tighter credit conditions in Australia (because Australia are net borrowers of foreign money) and the stock market to fall. Then the mainstream media will start to chatter of how ‘confidence’ has fallen in the market. If this chatter continues for an extended period of time (‘justified’ by falling stock prices and AUD), then consumer sentiments will start to follow as credit conditions tightens at the same time. As consumer confidence declines, aggregate spending will decline, which will in turn pull down more economic ‘indicators.’

The Indians will be carrying more firewood soon (see Do sentiments make the economy or the economy makes the sentiments?).

Of course, the Black Swan that can derail this scenario is further government interventions (which in turn will carry more Black Swans of unintended consequences).