If you still have lots of spare bullets in your investing arsenal (i.e. lots of spare cash free for investment), it is very tempting to use them up in fear of missing out on further rally. But if your over-riding concern is to preserve your capital in real terms, this is a very difficult market to invest.
For value investors, the proportion of undervalued stocks is decreasing as the stock market continues to trend upwards. Recently, a highly prominent banking analyst, Meredith Whitney has turned the most bearish for over a year:
If you are a technical analyst, you will see that stocks are at an extremely overbought territory. According to the Market Club Trade Triangle, the trend for the S&P500 is still at a very strong up-trend. Statistically, this is the point whereby the risk of a major correction is very high. The previous one is too mild to be counted as a correction (see Aborted correction?).
In terms of property prices, Hong Kong luxury apartments are bubbling away. Base metal prices (especially copper) have recovered strongly from the Panic of 2008. Chinese fly-by-night bidders are reportedly appearing in Australian residential property auctions. The Aussie dollar is approaching parity with the US dollar.
It looks very much like bubbly 2007 all over again.
We are not prepared to use our spare bullets in such a bubbly environment. But if you are based in Australia, we do see a silver lining. The price for gold is rising rapidly in terms of US dollars. But in terms of Aussie dollar, it has hardly risen. In fact, even though it is at a record high in USD, it is down 20% from the March 2009 record high in AUD.
Let’s say there’s going to be a short covering in the USD (see Currency crisis ahead? Part 1- Potential short squeeze on the US dollar) due to some deflationary threat. Chances are, gold price (along with commodity and stock prices) in USD will come down. At the same time, stocks worldwide will be down as well, along with the depreciation of the AUD. A falling gold price in USD will be mitigated by the depreciation of the AUD. As a result, Australian holders of gold may not suffer as badly as gold prices in AUD may not fall as much, perhaps even rising should the AUD depreciates very rapidly.
But even in this scenario, there will be a limit to a fall in gold price in USD. As we wrote before in Has gold moved on to a secular shift?, central bankers have crossed the line from being a collective seller of gold to a collective buyer of gold (e.g. Mauritius central bank is now buying gold). The Chinese will see any temporary strengthening of the USD as an opportunity to get rid of them to buy gold.
On the other hand, if there’s going to be a currency crisis, our guess is that gold prices will soar in USD. If the AUD depreciates against the USD as well, we will get soaring gold prices in AUD.
Our speculative view is that (and this is NOT financial advice) if you want to be on the other side of the trade in the next panic (i.e. on the winning side, not on the panicking herd’s side), the currently high AUD may prove to be a stroke of good luck for Australian investors because it gives them a wonderful opportunity to buy gold on the cheap. Not only that, if you are planning to buy physical gold, it helps that Australia is a gold producing nation (you may want to read our book, How to buy and invest in physical gold and silver bullion).
Only time will tell whether this idea will be a winning Black Swan trade.
Tags: Black Swan, bubble, currency crisis, Gold
