BHP The Old Warrior

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The Aussie dollar is hanging tough. It has not retreated against the US dollar overnight. The euro has, reaching a three-month low. And perhaps the most telling partnership of the week so far is the recoupling of gold with the US dollar. That is, both the dollar and gold are higher as capital quakes in its boots.

This is a repeat of the 2009 odd-couple pairing. Gold and the greenback usually move in opposite direction. It takes a weaker dollar to get a higher gold price. Or, in more traditional terms, it takes more dollars to buy the same amount of gold. But now, you have both real money (gold) and paper money (US dollars) enjoying the same tail wind.

This has started to carry over into some Aussie gold stocks, which we reckon will be pleasing to both Murray (who loaded up on gold stocks a few weeks ago for a trade) and Alex. Alex is in Hong Kong right now, by the way. He’ll be speaking about gold at a conference there, and should be sending over a dispatch for us shortly.

Here in Australia, the leadership of the index is being fought over by the Commonwealth Banks (ASX: CBA) and BHP Billiton (ASX: BHP). This is a subplot in the global story, but a compelling one nonetheless. The banks and the miners generally work together to drive the index and the economy. At least, that’s been the case for most of the last ten years.

But could their paths diverge now? BHP finished the day with a market capitalisation of $111.41 billion. CBA was just behind at $111.38. CBA is the protagonist of the housing market and, lately, the poster-child for high-yield Australian bank stocks sought after by global investors. It wants to be the most popular stock of the next five years.

BHP is the old warrior. And in fairness to it, if you added in its London market cap (it’s dual listed) it would quash CBA like a bug. But that’s also a reminder that BHP isn’t really an Australian company. It’s a multinational company that has some prized assets in Australia, especially iron ore. And let’s not forget shale gas.

The chart above shows the spot price for natural gas in North America. US natural gas sold for $3.89 per million units in February of 2011, when BHP paid US$4.75 billion for the Fayetteville Shale assets of Chesapeake Energy. The gas price went higher for a bit, and then it crashed – at about the same time BHP spent another $15 billion on US shale assets (Petrohawk).

The company wrote down nearly $3 billion on those acquisitions last year. And the loss arguably cost outgoing CEO Marius Kloppers his bonus and his job. But thanks to a bitter North American winter, gas demand has driven the price back up to where it was in 2011. BHP should reap the benefits of increased drilling in the Fayetteville Shale this year.

We point all that out because BHP’s Mike Yeager said the company would begin looking for on-shore Australian shale assets. It is late to the party. In our recent report, we wrote that the next 90 days would be critical for the Australian shale gas industry. And that if we’re right, a small number of companies in the Cooper Basin could be due for a big re-rating soon. Details here.

Regards,
Dan Denning
for The Daily Reckoning Australia

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From the Archives…

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Why Copper Doesn’t Like the S&P500
14-03-13 – Greg Canavan

A Crazy Warning Sign for BHP and CBA Shareholders
13-03-13 – Greg Canavan

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Dan Denning
Dan Denning examines the geopolitical and economic events that can affect your investments domestically. He raises the questions you need to answer, in order to survive financially in these turbulent times.
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Ross
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For commodities, back to the Baltic …

“The Baltic Dry Index (BDIY) averaged 774 since the start of the year, the lowest since at least 1985, according to the Baltic Exchange in London.” (Bloomberg)

http://investmenttools.com/futures/bdi_baltic_dry_index.htm

Watch the graph lines vs the CRB. Something will break there, there is too much store of value for too little physical demand. Hyperinflation it breaks up, deflation it breaks down, but reserve bankers sustaining their making it cruise along flat with no correlation to demand? That’s a big call.

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