I think the Aussie dollar is overvalued against the USD. Buying some US dollars, as a shorter-term trade, is a good hedge against the deflationary turmoil I see hitting markets in the next few months.
It is also useful to think of gold as a separate currency. You see it quoted in US dollars because the US dollar is the world’s reserve currency. It’s therefore a global benchmark for the price of gold.
But if you’re earning and spending Aussie dollars, it’s the AUD gold price that’s important. The strength of the Aussie dollar against the USD means that AUD gold has not advanced as rapidly these past few years.
But in times of turmoil, AUD gold does a superb job of protecting your wealth. Look at this very long-term chart of AUD gold below. In uncertain times (late 2008/early 2009) a falling Aussie dollar (versus the USD) turbo charges the rise in AUD gold.
The bottom line is gold seems certain to rise against all paper currencies. The long-term trend in the Aussie dollar gold price (see chart above) illustrates this perfectly.
In the meantime, short-term, central bank liquidity is pushing the market around.
If we know anything from the past few years, it’s that central bank money only has a short-term impact on markets.
More ominously, short-term, central bank liquidity has even less of an impact on the real economy. While global equity markets – and especially those in the US – have rallied strongly these past few months, the fundamental picture continues to deteriorate.
You make think this a strange thing to say given the generally upbeat commentary we have heard recently. Listening to the mainstream media, you’d be forgiven for thinking the global economy is ‘recovering’.
But I want you to consider two pieces of research that debunk this myth.
The first is from Bianco Research in the US. They point out that on 30 September 2011, the estimate for company earnings growth in the first quarter of 2012 was 8 per cent. By 30 December that had dropped to a 3 per cent growth expectation. As at 10 February, earnings growth expectations had fallen to 0%.
So after growing at double-digit rates for 8 quarters, then slowing to 5 per cent growth in the final quarter of 2011, earnings growth is likely to stall completely in the first quarter of 2012.
Meanwhile, the market rallies.
So don’t be seduced by the price action. Be wary of the crowd. Stay away from the running, blundering herd. And most of all, be patient.
It won’t be long before deflation rears its head again. At which time steel yourself to wade into the market and buy some very undervalued companies. It will happen, it’s just a matter of timing.
Editor, Sound Money. Sound Investments.
Publisher’s Note: Price action isn’t the only thing seducing investors. In fact, Greg Canavan has identified the three key mistakes Aussie investors are making right now. To find out what they are and how you can avoid them, click here…
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Written by Greg Canavan
Greg Canavan is a feature Editor at The Daily Reckoning Australia and is the foremost authority for retail investors on value investing in Australia.
He is also the author of Sound Money. Sound Investments (SMSI). An investment publication designed to help investors profit from companies and stocks that are undervalued on the market.
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