The Parity Party Continues

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–First the Aussie dollar reaches parity with the U.S. dollar. Now a new high against the Euro? Is double parity possible? Come to think of it, is there a currency that isn’t invited to this Aussie parity party?

–Your editor thumbed through the pages of the Internet this morning to find that the Aussie dollar will buy you 75 centimes, or three quarters of one euro. That’s an all-time high for the Aussie. Is it commodity-backed strength? Or is the Euro marching toward currency oblivion? For more on the story we head to the Iberian Peninsula.

–The latest object of speculation in Europe’s debt woes is Spain, both its government debt AND its banks. Ratings agency Moody’s put the Spanish government on debt-watch last week. Moody’s said Spain would face a “challenging environment” refinancing its debt in a year when so many other countries are putting their hand out for more gruel.

–With its banks on notice, the inevitable investigation of Spain’s debt bubble will begin. The evidence of the misallocated credit will be splashed across the financial pages. And people will wonder how Europe’s sixth largest economy got into so much trouble. It’s not that hard to figure out.

— Spain simply has a bit of China and America and Ireland and Iceland in it. In this New York Times article, you’ll learn that Spain has its own little ghost towns of empty subdivisions and houses. Artificially low interest rates in Spain caused a borrowing and building boom. You got a lot of real economic activity (building and construction) being driven by fake demand (credit).

–But if you’re thinking this is more good news for countries that are not in Euopre, it may not be a slam dunk to assume that what’s bad for Europe and America is good for emerging markets. Our friend Dr. Marc Faber says to beware of a 20-30% fall in emerging market stock markets. He reckons the worries about Europe are enough to spook investors and put them on the sidelines until the smoke clears.

–The trouble with the current economic battlespace is that the smoke never really clears. The fog of the global currency war obscures real values and distorts what you see. Sometimes the wind shifts and it clears the picture up a bit. But right now, there are a lot of obvious losers and not so many obvious winners.

–The most obvious “stayer” in the great currency debasement game is gold. Of course it’s probably not right to call gold a “stayer” in horse racing terms. Gold isn’t moving at all (it’s heavy). Everything moves relative to it. If you want to be unmoved, you own gold.

–What about our old friend oil? It’s been slowly rebuilding its reputation after getting utterly thrashed in the 2008 crash. You can see from the chart below how ugly it got for West Texas Intermediate crude (WTI). From a high of $145.31 it fell to as low as $30.28

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–If you’re scoring at home, that’s a fall of $115.03, or 79.1%. We’ll have Murray slap some Fibonacci retracement lines between the high and the low. But just eyeballing the chart, oil is has recovered half of its losses from the 2008 crash. And it’s bucking up on $90. It also looks like it’s locked in a bit of a trading range, which is another reason we’ll have Murray take a look (to see where the Point of Control is).

–You wouldn’t think higher oil prices are good for anyone’s economy (except the OPEC states and maybe Venezuela and Mexico). Of all the commodities, rising oil prices most quickly hit consumer wallets. It’s effectively a tax increase that reduces consumption on other goods.

–But is it a good investment idea right now?  After all, oil is priced in U.S. dollars too. The weaker the dollar gets, the higher oil will go. Would oil prices soar in a dollar crash? And would oil stocks follow? Would Aussie oil producers follow?

–This is the question we’ve taken up in the final monthly report of the year for Australian Wealth Gameplan. All will be revealed soon. The obvious criticism against the argument for higher oil prices is that they are self-limiting. Oil will eventually reach a price that forces people to use less of it.

–The best strategy, we reckon, is to take the long view. When you have a chance to buy scare assets that are in a long term bull market, you probably should. You need to be careful what you pay for them, of course. But next year will be all about consolidating a portfolio tangible assets or buying the companies that own them.

Dan Denning
For The Daily Reckoning Australia

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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9 Comments on "The Parity Party Continues"

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Freddy
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You were going very well until your comment about gold being “unmoved”.

Gold bugs are starting to sound like property spruikers.

Biker Pete
Guest

“Gold bugs are starting to sound like property spruikers.”

You must be very new here, Fred. ;)

Chris in IT
Guest

Freddy, Dan is correct. Gold doesn’t move relative to dollars. If gold goes ‘up’, what’s really happening is the value of your dollar has gone down. Not surprising if you happen to be in the states, where the monetary base expanded 400% in a year.

Chris in IT
Guest

dan,

” It also looks like it’s locked in a bit of a trading range, which is another reason we’ll have Murray take a look”

It was in a range up until 89 on Brent. 92.9 on TheIce right now. Broke through a week or so ago.

Freddy
Guest
Chris, By saying that gold is “unmoved” or “real terms” is suggesting that gold is the only thing that is accurately priced and not prone to speculation, manipulation, etc. I find the same people who make these assumptions then go on to contradict themselves by suggesting that gold prices are being manipulated by US banks. The value of gold has more than tripled in every single major currency around the world. That is some serious inflation being expected worldwide. I don’t believe wages would need to more than triple to make existing debts serviceable. And whilst talking about inflation, watch… Read more »
Ross
Guest

Watch this space. What happens in a balance sheet pretend enjoined currency is two choices

http://www.bloomberg.com/news/2010-12-22/new-zealand-economy-unexpectedly-contracts-as-earthquake-undermines-growth.html

1. The currency rebalance and the bank balance sheets get blown away (think Swiss bank lending into Hungary).

2. It goes the way of the EU and Euro umbrella if the dominant sovereign can bail out the minor party (but do we have the balance sheet leverage of the Germans? No we don’t!).

But buy some CBA retail bonds if you’re brave because Swanny’s got your back even if the debt ticket clipping wonder boy Henry has gone off to his wombats.

Adam from London
Guest

Two points. The EUR and the USD were at Parity in 2002 so is a return to this point really ‘a march to oblivion’?

Also Venezuela is a member of OPEC so it’s a bit strange to name it seperately to the ‘OPEC states’.

A bit more fact checking perhaps?

prozak
Guest

only regret over the last 2 years was that my buy for OIL was at $25 and I refused to budge or buy when it looked like I was off target.

prozak
Guest

Freddy,
your arguments are wasted on gold bugs.

Gold is the most leveraged market in the world….. gold bugs ignore this yet claim leverage in other assets is evil.

physical gold prices are driven by the futures market – rare for most assets…. gold bugs ignore this.

I could go on……

wpDiscuz
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