DRYBLOWER

The currency creep - Dryblower

A FUNNY thing happened on the gold market last week. In London, the price of gold went up. In Australia, it fell. For a few seconds this had Dryblower befuddled. Then he remembered a factor which could bring the 2007 stock market rally to an end - currency.

Dryblower

The rising value of both the Australian and Canadian dollar, aided by the sliding value of the U.S. dollar, is starting to become a factor in the minds of investors.

Nasty numbers are being produced by the people who use crystal balls to predict future mining company profits, and share prices. One such forecast is for dollar-value changes to slice 5% off mining profits this year.

If that is proved correct, or if miners start to bring out profit warnings, then we may be in for a May correction, very much like we saw last year.

For anyone with a faulty memory May 11 was the high water mark of the 2006 share price rally, if not the entire resources boom. That was the day BHP Billiton hit $32 a share. By the end of May the stock was down to $28.23, a fall of 11.8 per cent which wiped about $13 billion off the value of the world’s biggest miner.

BHP Billiton, and most other miners, has recovered from their 2006 shock, but not completely.

Unless Dryblower is mistaken there is a fragility to the market caused by that perpetual tug of emotions we have between the believers in a commodity market “super cycle”, and those who pedal a standard commodity cycle.

Super-cyclists believe the rise of China and India has created conditions for a perfect storm of high and rising demand for commodities. Conventional cyclists say supply is rising to meet demand.

What makes the currency effect we have seen creep into the equation so interesting is that up until now everyone had forgotten the power of money to change the outlook.

Like a tide no-one noticed until it was lapping at edge of the picnic rug, currency is a stealth factor in valuing assets, as shown in these two examples of what can happen when your back is turned.

In the gold market, the London bullion price rose last week from $US673.50 an ounce to a close on Friday of $US681.75/oz, with that gain of $US8.25/oz taking gold to its highest since late February.

In Australia, the price of gold fell from $A824.66/oz to $A819/oz, a decline of $A5.66/oz thanks to the work of the dollar which, over the same time period rose in value from US81.67 to US83.24, its highest against the U.S. currency in 17 years.

Arguments that the rise was only against the U.S. and not the British pound, or the Euro, are invalid. Just as there is no point in arguing that it’s the U.S. dollar falling rather than the Aussie rising.

Why? Because most commodities are sold in U.S. dollars – and that’s how the miners get paid, and right now they’re getting paid less.

And it’s not just gold which is falling in value. Uranium, the speculator’s favourite, rose in value last week from $US95 a pound to $US113/lb, a gain of 18.95%, and reason to celebrate.

But, in Australian the uranium price only rose from $A116.3/lb to $A135.7, a gain of $A19.5, or 16.6%.

True believers in the super cycle and a perpetual rise in the uranium price will say that there’s no real difference between a gain of 16.6% and 18.95% - but Dryblower has been around long enough to say forget about the short-term difference and look at the trend.

As old hands in the investment world will tell you “it’s the trend which is your friend” and right now the trend in future mining company profits is down, and that can only mean one thing for the stock market – a May correction (again).

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