Alternative Currencies, A Look at the Australian Dollar

With the mounting debt faced by the U.S. government, it makes sense to exchange a part of your USD portfolio into a basket of alternative currencies. Long-term the devaluation of the dollar is almost inevitable. For a refresher, please watch this video by Congressman Ron Paul that succinctly covers the subject of a future falling USD.

I recommend basing your alternative currency investments on your perception of the home countries political stability and future economic potential.

In the above two regards, The Australian Dollar is one of the possible hedges for safely protecting your cash holdings. Australia is a politically stable country with a GDP per capita higher than the UK, Germany and France. Australia is rich in many commodities.

Taken from the Australian Government Mines Atlas on Iron:

In 2007 Australia had about 13% of world EDR of iron ore and was ranked fourth after Ukraine (19%), Russia (16%) and China (14%). In terms of contained iron, Australia has about 15% of the world’s EDR and is ranked second behind Russia (19%). Australia produces around 16% of the world’s iron ore and is ranked third behind China (32%) and Brazil (19%).

Taken from the Australian Government Mines Atlas on Gold:

The USGS estimate of world gold reserves of 42,000 t was similar to 2006 According to the USGS, South Africa still has the world’s largest reserve of gold at 6000 t (14.3%), similar to 2006. According to the USGS Australia has the second largest reserve with approximately 12% of the world’s holdings.

Taken from the Australian Government Mines Atlas on Uranium:

Australia has the world’s largest resources of uranium in RAR recoverable at less than us $80/kg U (equates to EDR), with 34% of world resources in this category at December 2007. Other countries with large resources include Kazakhstan with 12%, Canada 11%, South Africa 7% and the Russian Federation 6%.

Olympic Dam is the world’s largest uranium deposit. Based on ore reserves and mineral resources reported by BHP Billiton as at June 2007, Geoscience Australia estimated that the deposit contains 26% of the world’s total resources in RAR recoverable at less than US$80/kg U.

Taken from this page on Australian Natural Resources:

Natural gas fields are liberally distributed throughout the country and now supply most of Australia’s domestic needs. There are commercial gas fields in every state and pipelines connecting those fields to major cities. Within three years, Australian natural gas production leapt almost 14-fold from 8.6 billion cu ft (258 million cu m) in 1969, the first year of production, to 110 billion cu ft (3.3 billion cu m) in 1972. All in all, Australia has trillions of tons of estimated natural gas reserves trapped in sedimentary strata distributed around the continent.

Particularly with commodities prices crashing, Australia is faced with concerns of exasperated negative GDP growth that is fueling the fall in the AUD. With the benefit of large reserves in many commodities, Australia enjoys a small level of self-sustainability not found in many well developed countries. In a world faced by pandemic uncertainties, wars and political instability, the AUD should be a consideration when focused on preservation of capital. If you believe we will eventually emerge from a recession and return to a commodity bull market, Australia’s rich reserves is a future story to focus on for possible currency appreciation.

The AUDUSD chart shows that the AUD has fallen from near parity with the USD at .95 to .67. I would build a position in the AUD at under .65. In the past decade the AUD has traded above .65 for nearly 7 out of the last 10 years. The fall of the AUD has been brutual and is an outlier compared with the performance of other major currencies.

If your long-term view is that the USD will fall, now would be a good time to build an alternative currency portfolio. The AUD has the benefit of high interest rates, with one year deposit rates still hovering in the 3.5-5% range. For multi-year strategies you may want to look at buying Australian Government Bonds. A quick look at Bloomberg.com for Australian Government Bond Rates shows that a 5-year government bond is currently yielding 3.3%.

Compare the above chart to what Bloomberg.com shows for US Government Bond Rates and we see that a 5-year US treasury bond is yielding 1.48%.

Analysts Flip Flop On Oil Again

I caught the following quote from this Yahoo Article on yesterdays fall in crude oil prices:

“I don’t think there’s anything they [OPEC] can say at this point,” said analyst Stephen Schork, who doesn’t expect a sustained rally in oil prices during the first half of this year.

“They didn’t have control of oil prices when it was on the way up,” he said. “They don’t have control of it when it’s on the way down.”

While I’m not familiar with Stephen Schork’s historical view on crude oil, a vast majority of analysts have rapidly switched their views on oil to echo the sentiment of the quote above. I remember less than a year ago how analysts cited fundamental demand being the driving force behind crude oil prices and how OPEC would never let the price of oil fall below $80. Analysts cited demand from emerging economies, mainly China and India, as the driving force behind existing physical demand. With prices having collapsed over 70% in slightly over half a year, did more than 70% of the people in China or India stop driving cars? For that matter, will 70% of the people in the world stop driving cars, stop taking airplanes and stop using heating oil? Automobiles, Heating, Airlines etc. will still continue to function and be required since they are a part of our global infrastructure and life needs. Physical demand will be curbed due to a global recession, but some basic demand will always be present. Global crude oil usage definitely hasn’t fallen by 70%+ and isn’t expected to fall by such a wide margin from current use. Roughly five years ago, analysts began harping crude oil prices and they quickly forgot that crude oil traded in the $20 range and below for a solid decade before that.

I do agree with analysts, that there was a necessary premium attached to crude oil prices over fears of political instability and war negatively impacting the supply side of the equation. Those fears are still in the market today. With that premium in place, a smooth and steady rise in crude prices, in lock-step with real physical supply and demand, should have been what we experienced from oil’s initial rise. Financial instruments instead mucked with real market supply and demand.

This all goes to show that speculation above fundamental demand was the driving force behind rising oil prices. All manner of speculation led to structured products that were tied to spot prices and futures contracts. These notes and products almost never entailed some form of physical delivery and often included some form of principal protection so losses were converted into dollar terms. Bankers created products tied to future production by private firms and made bets on spot prices that had nothing to do with taking some form of delivery in a certificate form or storing barrels of oil. The lax regulation among these products is similar to the lax regulation with short-selling. Most shorts don’t have physical shares to deliver when they are required to cover positions and short volumes can exceed the actual number of physical shares available. Fundamental physical demand may not have done so much to drive up prices as some analysts considered. Previously available liquidity and interest in structured products has nearly evaporated causing the current collapse in prices. In many ways the fall in crude oil is the result of forced deleveraging since many people are selling anything they can, including derivative notes and futures contracts, in order to raise cash.

What the Yahoo article quote above also accurately illustrates is that trusted analysts have no better idea apart from you or I what the price of oil will be tomorrow. The price collapse in crude has put tremendous pressure on giant oil trusts like PWE, Penn West Energy, one my previous picks for its enormous dividend payment. Production costs haven’t fallen in-line with the fall in physical prices and until they do I expect that there will be additional operation suspensions and downward pressure on energy related shares.

Once oil prices stabilize in a illiquid market, we will see true market supply and demand without the influence of the highly leveraged credit, structured products and derivatives industry.