- Money Morning Australia

Australia: The World’s Investing Casino


Written on 23 September 2011 by Kris Sayce

96.92… we’ll explain the significance of this number in a moment.

But first…

Everything has fallen over the past 24 hours.

Aussie stocks dropped 2.6%… closing at the lowest level since mid-2009 (but not the lowest intra-day price. That occurred on 8 August).

Overnight, U.S. markets fell too. The Dow Jones Industrial Average fell 3.5%… and the benchmark S&P 500 dropped 3.19%.

In Europe markets fared even worse. The FTSE 100 sank 4.67%, the German DAX fell 4.96%, and the French CAC 40 dropped 5.25%.

As the Age helpfully pointed out late yesterday, we’re in a “bear market” – thanks for letting us know!

But it’s not just stocks. Gold has taken a beating too… trading as low as USD$1,724. Has the gold bubble burst? Or is it still bursting?

As you know, we don’t believe gold is in a price bubble. Besides, in Aussie dollar terms, gold is doing just fine – trading at $1,780 as we write… only $30 or so from its peak in August.

But gold isn’t alone. Silver dropped 11%… copper is down 13% from the peak… tin is down 31% from its peak… and West Texas Intermediate Crude dropped 6.3% overnight.

Finally, one other thing has dropped. This is where we get back to the significant number we showed you at the top of this letter – 96.92…

Not so strong after all

It’s the number for an asset that’s fallen 11.9% since it peaked in late July… an asset we were told would “never be sold again”… an asset the mainstream told you as recently as this week was “stronger-for-longer”…

You know what we’re talking about. That’s right, the Aussie dollar. Early this morning, the Aussie dollar slumped to USD$0.9692.

And there’s sure to be some red faces in the mainstream today. The jingoistic cheering-on of the Aussie dollar has been embarrassing. “It’s a new reserve currency”, they stupidly yelled.

“Australia is a safe haven from North America and Europe”, they dumbly proposed.

Turns out, as we’ve warned you all along, when push comes to shove, traders will dump the Aussie dollar in droves. Australia isn’t a haven for foreign investors.

As we wrote, as recently as 20 July:

“When the proverbial hits the fan again, there’s one thing you can bet your bottom dollar on. And that’s offshore players will forget their comments about the ‘bullet proof’ Aussie dollar.

“They’ll ditch it and run for cover… just as they did in 2008.

“Forget the jingoism about the Aussie dollar. And the claims it’s one of the new reserve currencies. The Aussie dollar is what it’s always been – a commodities play.”

Look. We’re not saying, we told you so. We’re not vain enough to say we get everything right, because we don’t. But we know when something doesn’t make sense.

The idea of the Aussie dollar becoming a reserve currency and investor haven was one of those stupidities. And now the market has realised this and regained its senses.

Aussie dollar heading south

That’s one of the things we love about the market… especially free markets. Its habit of making fools out of fools… especially those who think they can manipulate the market as they see fit.

Of course, there’s every chance the market will lose its senses again. And the mainstream clowns will once more crow, “You see, the Aussie is a reserve currency… it is a safe haven.”

If that’s what they want to think, fine. But us? We prefer the insight of our in-house technical analyst… Slipstream Trader, Murray Dawes. He sent the following chart to your editor this morning.

It’s a five-year chart of the Aussie dollar against the U.S. dollar:

five-year chart of the Aussie dollar against the U.S. dollar
Click here to enlarge
Source: Slipstream Trader

Here’s what he told us:

“The Aussie dollar has just turned over into long-term downtrend with the 10-week moving average (MA) crossing the 35-week MA. You can see in the chart that each time this has happened in the past five years we have seen a sharp sell-off. Also, we have fallen under the 2008 high of US98.5c causing the weekly chart to look like a potential double top.”

Bottom line: Murray is bearish on the Aussie dollar. It doesn’t mean the Aussie will head south in a straight line. But it means a move down is a higher probability.

And given his track record of short selling this market we’re loathe to ignore his views.
[Ed note: he's just sent his traders a message telling them to close out a 17% gain on Fortescue Mining... not bad for four weeks work!]

Don’t forget, the daily turnover in currency markets is huge…

Australia: the world’s investing casino

According to the Bank for International Settlements, in April 2010 the daily turnover was USD$3.98 trillion.

With around 7.6% of that volume involving the Aussie dollar. It’s hard to know the exact numbers, but only a fraction of daily trade involves transactions for goods and services. Most currency trading is traders and speculators buying and selling currencies based on their view of the market.

As soon as the sentiment switches from one side to the other you get big price moves… as you can see on Murray’s chart above.

And that’s the point we want to make to you today. The high Aussie dollar never had anything to do with reserve currency status or safety. It was all about traders punting on Chinese economic growth and soaring commodity prices.

If traders start believing China won’t grow as fast and commodity prices won’t rise as fast, well… there’s not much reason to buy Aussie. Put it this way, foreign investors aren’t about to buy Australian dollars so they can invest in Myer or Harvey Norman shares.

The Aussie dollar has always been a “risk” asset… and guess what? It always will be.

Cheers.
Kris

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15 Comments For This Post

  1. mel Says:

    Wonderful article Kris. It has been quite comical watching the mainstream bang on about Australia for the last couple of years… anyone would think we adopted a similar attitude to the u.s. (see a picture of someone chanting ‘USA, USA!’). Reality is we were lucky to have a surplus a couple of years ago and lucky to have some metal in the ground.. apart from that we dont really count for much on the global front, do we?

  2. Drood Says:

    http://www.marketwatch.com/investing/index/spx/options

    Ok all you supertraders , what does this tell you?

  3. SG Says:

    So who are the two Bozzo’s that don’t like this article ?

  4. TRB Says:

    For a start Drood I’m no supertrader not signing up to the cash prize competition from news limited.
    What does it tell me?
    Well the market is very oneside the puts or bears are betting big on a downfall.
    When the market players are all on the same side a trend change is near.
    Herding is becoming strong.
    Good example would be silver going to $700 a ounce then fell 30% 0r the US dollar is toilet paper then it rally strongly in 2008 or the OZ dollar is bullet proof heading to $1.50 US?
    In otherwords you must see very extreme reading for a trend change in the irrational herd.
    Are those put reading extreme trend change near?
    At this stage anything can happen if not sure stay out and keep your cash safe by not trading!
    Staying out takes real discipline.

  5. Peter Fraser Says:

    Wow – gold is down another 5% down to $1656 USD and silver is down another 14% – down below $30 USD at one point – down from $40 per ounce only 2 days ago. Those overnight falls are massive.

    Gold $1657 is off 14% from its high of $1907, and silver $30.88 is off by a massive 38% from its high of just under $50. In fact silver is now back where it started in January this year – all of the 2011 gains have been wiped out.

    Wow – and the $AUD is down about 10% from its high. In fact the $USD has risen against all currencies except the Yen.

    Interesting… JC will have done well but the silver bugs are up the creek. At least gold has made a profit so far this year.

    The futures are still pointing down.

  6. SG Says:

    All excellent political cover for a little more quantitative easing in all the wrong place……………..barbarous relic

  7. Drood Says:

    TRB ………what it says is an awful lot of people are betting on the market tanking in October ( apparently )

  8. Drood Says:

    specifically the s&p 500

  9. Max Says:

    Real Estate is a “massive bubble” yet this Kris S has spriuked precious metals all year. Substances that basically have basically no practical use, provide no yield, and is dug up out of the ground, only to be put back into the ground – in a vault. Its “value” is all speculative and of course also fuelled by credit. But real estate is the bubble, right?

    If you borrow money for a house, you can at least live in it.

    The double standards here are incredible.

  10. MsSolarFelineAU Says:

    Peter Fraser @ post #5, Case Closed: CME Hikes Gold, Silver, Copper Margins | ZeroHedge http://www.zerohedge.com/news/case-closed-cme-hikes-gold-silver-copper-margins
    Europe blows up -> currencies flee to “relative safety” (snort) of USD -> US is broken -> where does this _fiat_ go?? Oztrayleeya looks good!

  11. Peter Fraser Says:

    MS Solar – which came first. It appears that the margin tightening is in response to the volatility, not the cause, although it will lead to more falls.
    http://online.wsj.com/article/SB10001424053111903791504576589221715678498.html

  12. TRB Says:

    Question the gold and silver bugs need to ask is this bubble burst or just another small correction to higher prices?
    A good buying opportunity?
    The mantra the FED is printing money only way out is hyperinflation still very strong crowd psychology.
    Mr Market has shown his hand most of the massive increase in gold and silver has been speculative and high leveraged plays it is not fundamentals driving this bull market only irrational fear of hyperinflation and greed.
    Been happening for hundreds of years all bubbles eventually break because of high debt and no real cash to pay the interest a perfect minksy moment.
    All we need now is the bond vigilantes increasing interest rates on corporate junk bonds and government bonds.
    Then my friends we will see some real fun and fireworks GFC 2!

  13. Andrew Says:

    August 17th 2011 – “our message is ignore the gold bubble rubbish and keep prudently buying gold whenever you can” – Kris Sayce

    Yet at the same time spruik the opinion that Real Estate is massively overvalued and to sell before we see 40% nationwide drops.

    Your credibility has taken a huge hit here.

  14. SvetlanaBabe Says:

    I can sell my gold ingots I bought at the beginning of 2011 for nice ‘double digit’ return today.
    The neighbours property has been on the market for 4 years. His super is down 35% from the 2007 highs. If he bought gold then, he would have doubled his money!
    I like something that I can sell whenever I want to, that is why I like {{{GOLD}}}.

  15. Peter Fraser Says:

    svetlana – you are cherry picking your time frames.

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