Daily Equity Report

The US dollar continued its slide against a basket of currencies, most notably long time trading partner Japan's yen. The dollar fell to below 100 yen for the first time sine 1995. It’s not only other currencies, but global assets that are priced in US dollars that move up as there is more and more pressure on the US dollar. Is it going to be a case of the US currency not worth a continental?

You have heard the phrase – not worth a continental. Well a Continental currency was a paper currency issued by several American Colonies, as well as by the Continental Congress, after the Revolutionary War began in 1775. The currency was denominated in both pounds, shillings and pence, and dollars. With no solid backing and being easily counterfeited, the continentals quickly lost their value, giving voice to the phrase "not worth a continental". 1

Is this now the exact same thing happening with the so called mighty US dollar? Greenspan and Benanke’s printing presses of the US dollar, is akin to a type of counterfeiting. Over the last 8 years the US Federal Reserve has continued to provide liquidity essentially increasing the money supply. One of their biggest fears is a Japanese type deflation, low growth environment, and they will continue to do all in their power to avoid this.

The US dollar index is the relative value of the US dollar against a basket of trading partner currencies. In 2001 this index traded at around 120. No 7 years later it has fallen 38% to trade around 75.

One of the beneficiaries of a declining US Dollar has been gold. Bullion is a precious metal that has a negative correlation to the US dollar. It is essentially a monetary asset, that has over centuries retained is purchasing power.

It has a negative carry trade in that it does not earn interest or dividends, but investors incur a holding cost. But as the US Federal Reserve has been lowering interest rates, so the attraction of gold is elevated. i.e. the negative carry trade or opportunity cost decreases.

Gold prices reached $1000/ oz. Bloomberg reckon that the inflation adjusted price of the $850/oz level reached in early 1980 is now $2224. The prices of gold surged on the back of double digit inflation and oil moving up sharply due to Middle East instability – sounds familiar.

So far local gold companies have not benefited from the rising price of gold bullion. They have had cost and production pressures which have negated the higher selling price of the yellow metal that they mine. Now however this may change given these high prices and the weaker rand. We are looking closely at manager’s inclusion of gold shares in their portfolios.

I have updated Seed’s 2 pager monthly market summary, which looks at valuations of local and global markets. This normally only goes out to our clients. If you would like a copy, please sign up on our newsletter list and we will send out early next week. Visit www.seedinvestments.co.za and sign up for the newsletter.

Sincerely

Ian
ian@seedinvestments.co.za
www.seedinvestments.co.za

1 source Wikipedia