Gold Logjam Thanks to This — Impact of Stronger AUD on the Gold Price

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AUD Gold Price - Strong Aussie Dollar impacting the Gold Price Rally

And away we go for another week. I saw a headline over the weekend. It was along the lines of ‘gold rally fizzles’.

What gives? Gold in US dollars is a hefty US$1,810. And in Aussie dollars the gold price is still a very healthy $2,585.

However, gold in Aussie dollars has jammed around this price level for about three months now.

Why so? The Aussie dollar, of course! It was 55 cents to the USD in the middle of March. On Friday it was 70 cents.

All through 2019 I theorised that the Aussie dollar would show strength against the USD and against expectations. It didn’t happen.

I finally threw in the towel on the idea. Cue a massive rally in the AUD!

This is important. Most mining projects I see input an assumption of an exchange rate of 70 cents.

Any higher and the earnings projections begin to change…for the worse.

Wouldn’t it just be like the market to send the Aussie dollar even higher and confound everyone?

I would say the odds of this happening are much higher than anyone expects. It’s not really a story about the Aussie dollar anyway.

It’s the pressure on the US dollar. The US money supply is exploding. And there is no short-term exit from the COVID-19 crisis.

US Congress is highly likely to need more financing to offset the downturn. But the US government is already running historic deficits.

That means the Fed printing press will be needed to buy the bonds. Gold in US dollars should go up.

But the same force driving the US gold price higher could take the Aussie dollar with it.

That could put an unexpected lid on US dollar exposed businesses that have to translate their earnings back into their home currency.

You can put producing miners in this basket.

The flip side is that it could be a boon for retailers like Kogan or Kathmandu that source their inventory from overseas.

One wonders what the RBA would do if the AUD keeps rising.

They have no room left to slash rates unless they’re prepared to go negative.

We’ll see on all this. For now I’m wary of having a fixed long-term view of anything.

Perhaps I’ll make one exception. The idea of passively investing in an index ETF — on the ASX 200 or S&P 500 in the US — is most likely a ticket to nowhere in the 2020s.

Look at the table below to see why. You can see that, contrary to the current perception around the market rally, most US stocks have had a rough ride in 2020…


Port Phillip Publishing

Source: Woodlock Capital

[Click to open in a new window]

The basic dynamic is that the bigger stocks have weathered the downturn and the smaller ones have not.

It’s another way of showing that it’s the big US FAANG stocks that keep driving the market. You could just own them and forget the rest.

An investor called Mark Arnold expressed it like this recently…

It really reinforces our view that we are permanently stuck in a no-growth or low-growth world. We think that’s going to be a big drag on earnings per share growth for the major indices around the world for the next 10 years…

You’ve really got to back the winners. If you’re on the other side of the divide, you’re really going to struggle.

While we may be in a ‘low growth’ economy, there are abundant opportunities in individual stocks. However, we’re all going to need the courage of our convictions to back them.

Look at all the naysayers on Tesla since it began…which happens to be up more than 400% this year. I’m looking to the new industries forming in space and genetic editing for the next big plays in the US.

And you? Let me know at letters@profitwatch.com.au.

Best wishes,

Callum Newman Signature

Callum Newman,
Editor, Profit Watch

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