Alternative Currencies, A Look at the Australian Dollar

Posted on January 16, 2009 , filed under Stocks | Print This Post

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%.

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1 Comment »

Comment by Ross

2009-06-28 16:55:13

While gold mutual and exchange traded funds do have their positives. I’m a proponent of investing in actual bullion.

Shares in funds are still paper. If a healthy proportion of savings (don’t go crazy putting more than 30% of savings in precious metal investments) is invested in gold as an inflation hedge it might as well hedge counter party and systemic risk as well. Actual bullion products give this advantage.

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