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When I was in college, I worked on the Cog Railroad that runs up the side of Mt. Washington in New Hampshire. One of my favorite times was at the end of the season, when the surrounding slopes and valleys of the White Mountains would turn flame red, royal purple and rich gold with the change of seasons.
Scientists will tell you that the colors are always there — just hidden by the bright green chlorophyll in the trees’ leaves. Come autumn, a tree prepares for the winter by sucking nutrients out of its leaves and into its trunk and roots. The leaves stop making chlorophyll, and as the green fades, the other colors come to the fore.
Right now, we’re seeing a similar change happening in our wallets. Those green U.S. dollars are fading fast and other colors — not only gold, but a rich rainbow of foreign currencies — are getting their day in the sun.
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In fact, look at my chart and you’ll see that the long and glorious summer of the U.S. dollar has certainly passed. What’s more, the transition has really picked up steam over the past 12 months, and gold has accelerated upward at the same time.
More on the yellow metal in a moment. First, I want to tell you about another area that is benefiting from this metaphorical change in seasons …
Australia’s Rich Natural Resources Make
It a Great Play on the Greenback’s Slide
Canada’s unemployment rate recently hit the lowest level in 33 years. Wages are rising twice as fast as inflation. And Canada’s currency, the loonie, has already hit parity with the buck.
But as bullish as I am on Canada, I’m even more excited about Australia, which is benefiting from the same forces. Let me explain …
Both Canada and Australia are resource rich countries. And both are feeding commodities into the emerging markets of Asia and the Pacific Rim, which are growing at phenomenal rates.
China and India, with 40% of the world’s population between them, are expanding their economies at double-digit rates. China, for example, uses about three times as much base metal per unit of GDP as an advanced economy.
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All this demand heats up the economies of the resource-providing nations. Their central banks raise rates and their currencies strengthen as investors flock to the higher yields.
Higher rates would normally cool off an economy, but the buyers in China and India don’t care — they want the raw materials anyway. So they keep buying more and the resource-based economies keep getting hotter and hotter! And yet until demand slows down, there’s no reason for their economies to slow down.
Important: Australia, which ships a whopping 60% of its exports to Asia, is especially well positioned to benefit from this vicious cycle!
We’re already starting to see a lot of strength Down Under:
- Australia’s dollar, the Aussie, recently hit a 23-year-high against the greenback, as prices for Australia’s exports of coal and iron keep rising. (BHP Billiton is expected to win another 30% price hike for iron shipments to China in negotiations that are going on right now.)
- Australian two-year bonds are yielding 6.58%, about 2.5 percentage points more than U.S. Treasuries of similar maturity, the widest gap in three years.
- Australia’s economy is expected to expand 4.4% this year, according to the International Monetary Fund. Compare that to expectations for 2% growth in the U.S.
- And Australia’s unemployment is at a 33-year low.
Result: The Aussie is up nearly 10% just since August, and should climb another 11% by the end of 2008, according to Toronto-Dominion Bank.
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If you want to ride this trend, you could buy the Australian Dollar Trust ETF (FXA). However, I think an even better way is through the iShares MSCI Australia Index ETF (EWA). It’s up 20% in the last three months compared to just 5% for the Australian currency ETF.
Now, let’s talk about another investment that has been performing well, and has more room to run …
Gold Continues to Shine As
The Dollar Loses Green
Gold has already had a great run, but I think it can go much higher, especially if you factor in inflation. And since the value of the U.S. dollar directly affects gold — the two are inversely correlated 92% of the time — you can’t really look at gold in the long-term without adjusting for inflation.
Adjusted for inflation, gold’s high of $850 in 1980 is more like $2,270 in 2007 dollars. I don’t think gold will get there right away — but the target is out there, daring us to hit it.
And even that target is not factoring just how dramatically things have changed (for the worse) since 1980. The U.S. has gone from a trade surplus to a yawning trade deficit. The Treasury is printing dollars by the ton to make up the difference.
Meanwhile, the major gold miners are not finding new large deposits. In fact, world mine production will drop 1.6% in the second half of this year to 1,284 tons, from 1,305 tons in the year-earlier period, according to analysts at GFMS.
A gold ETF, like the streetTRACKS Gold Shares (GLD), is an easy way to ride this trend. You can also consider Van Eck’s Market Vectors Gold Miners ETF (GDX).
Keep in mind, other commodities will do well, too — copper, nickel, iron, steel, and especially agricultural commodities. These are all things that the booming economies in emerging markets need.
Whatever You Decide to Do,
Move Fast Because Winter’s Coming!
After autumn comes winter, and this may be the winter of discontent for the U.S. dollar. Chronic problems including the huge Federal debt, and the implosion of the U.S. housing sector could come home to roost, and perhaps lead to more dollar selling by foreign central banks.
If that happens, the dollar’s decline could be so quick it will make your head spin!
But let’s not focus on the negative. I believe the smart thing to do is use any “Indian Summer” in the U.S. dollar to get exposure to gold and foreign stocks.
And if you want the best of both words, get a stake in foreign stocks that mine gold! Those are the kind of stocks I’m putting in my Red-Hot Global Small-Caps portfolio.
Remember, seasons change but each shift brings new opportunities. Investors who have the foresight to prepare in advance stand to ride these trends for all they’re worth.
Yours for trading profits,
Sean
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Money and Markets (MaM) is published by Weiss Research, Inc. and written by Martin D. Weiss along with Sean Brodrick, Larry Edelson, Michael Larson, Nilus Mattive, Tony Sagami, and Jack Crooks. To avoid conflicts of interest, Weiss Research and its staff do not hold positions in companies recommended in MaM, nor do we accept any compensation for such recommendations. The comments, graphs, forecasts, and indices published in MaM are based upon data whose accuracy is deemed reliable but not guaranteed. Performance returns cited are derived from our best estimates but must be considered hypothetical in as much as we do not track the actual prices investors pay or receive. Regular contributors and staff include John Burke, Amber Dakar, Adam Shafer, Andrea Baumwald, Kristen Adams, Maryellen Murphy, Red Morgan, Jennifer Newman-Amos, and Julie Trudeau.
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