We also had a quick chat about gold stocks with Diggers and Drillers analyst Alex Cowie. The question we put to him is the one everyone is putting to us: how are Aussie gold stocks going to move up if the Aussie dollar keeps gaining strength against the USD?
Alex says that despite the USD whiplash, “The AUD gold price is fairly stable. The AUD price of gold is therefore more of a true measure of gold’s strength against all other currencies; or possibly the Euro gold price is a better example as the Euro is a broader based currency. Big changes in the gold price in the AUD or EUR would be more reflective of true supply and demand dynamics.”
Ah. So for gold to move in Aussie dollar terms there has to be more than just a big bear market in the USD. Demand for gold has to rise globally.
Alex says, “China’s change in policy regarding gold ownership could be a huge influence on increasing demand in coming years. You have hundreds of millions of middle class Chinese being encouraged by the big-man to buy and own the stuff.”
And the investment conclusion? “At least Australian producers are not going to be quite as exposed to the whiplash price movements of the USD gold price. Cheaper production costs must be the key. That’s what you want to look for to begin with.” We’ll keep you posted on what Alex finds in his research.
What about the rest of this market, though? Have the Feds and the politicians managed to engineer a recovery without any more deleveraging in a massively leveraged economy? We know they haven’t repaired the quality of the troubled assets in the financial system. But has their hocus pocus harem skarem managed to convince investors that it’s okay to lever up again?
Maybe so. We’ll see. We reckon it will be nearly impossible to forestall further write downs in assets that were bought with credit (houses, shopping malls, stocks, you name it). There is too much global capacity…too much money tied up in assets not producing anything…too much household debt…and too much government borrowing that’s failed to produce cash flow that can pay interest and principal on that debt.
But hey. All those are just troublesome details. It’s Friday. Let’s enjoy the Ponzi Party while it lasts. Just don’t forget to plan for the end.
for The Daily Reckoning Australia