What a hullaballoo. Poor old Commonwealth Bank [ASX: CBA] has dragged itself through the mud in the last 24 hours.
It is supposedly the safest and most conservative bank in Australia, thanks to the millions of ‘Dollarmite’ and pensioners passbook accounts. You only have to look at the recent stats on the inflow of funds into retail banks to see that CBA grabbed the lions share.
As you will have read in the press, the CBA was using broking firm Merrill Lynch (now owned by Bank of America) to stiff retail investors by offering to sell shares at a discount to the prevailing market price.
Apparently all went swimmingly until CBA announced to the market at 7.14pm on Tuesday that the full line of $2 billion worth had been flogged. Oh, and loan write-offs would be about 30% more than previously forecast.
That has caused a bust up between Merrill’s and CBA over whether CBA had told Merrill’s prior to the placement. The investors that bought the stock are certainly of the opinion they weren’t told.
And that is what the mainstream media is focusing on. However, they are missing a fairly important point.
If, as CBA claim, Merrill’s were told about the revised write-offs then CBA is obliged to notify the market immediately. Failure to do so would result in Merrill’s and its clients acting on information that was not widely known to the market.
In other words, insider trading.
Therefore, it could be argued that even if CBA did tell Merrill’s about the increased impairment the Merrill’s brokers would not be able to tell their clients anyway.
We’ve got no idea who is to blame. To be honest, we don’t really care. But we are pleased to see that Merrill’s analysts have wasted no time in sticking the knife in. As of this morning it has downgraded its CBA price target from $36.20 to $33.80.
If there’s a message in that it’s “don’t annoy your broker.”
Gold for Aussie Investors
It is a dilemma for Aussie gold bugs everywhere. The US economy and currency is going to pot, and as a result the price of gold has held up nicely.
As of this morning it is trading at USD$866 per ounce. That’s a rise of USD$120 per ounce in only two weeks.
The endgame of the collapse of the US dollar and rise of gold would seem to be playing out. Time to add up the profits.
The only problem is that during the same period the Aussie dollar has strengthened meaning that your USD$120 gain is actually only about AUD$50. It’s still a profit, but not the AUD$200 that you may have been hoping for.
Therein is the extra complexity for gold investors. How to profit from a rising gold price if you are also of the opinion that the USD will fall in value relative to other currencies, such as the Aussie dollar.
We take a fairly simple view. Why would anyone in their right mind invest in US dollar assets at the moment? Especially treasury bonds that are costing investors for the privilege of lending money to the government.
It makes you wonder why the Japanese and Chinese are still holding US treasuries. Maybe that’s the reason why the Yen has appreciated so much recently against the USD. Why earn zero interest in the US when they can do that in their own market.
And if the US economy is going to stay in recession then the Japanese have little incentive to keep the Yen weak.
For Aussie investors the trade on this one is not as difficult as it sounds, although it does sound contradictory. And it is probably something you wouldn’t bother doing. In order to remove the AUD/USD movements you would have to hedge your gold exposure through… buying US dollars and selling Aussie dollars!
As I say, it adds an extra complexity into the equation. The reality is that Aussie gold investors just need to have a lower profit expectation. A stronger Aussie dollar is bad for those holding US dollar priced investments (such as gold).
So the question becomes whether you believe the price of gold will increase by a greater amount than the Aussie dollar appreciates against the US dollar.
The answer is it probably will. Especially when the inflation rabbit is let out of the hat!