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by Professor von Braun
October 24th, 2000
Finally October 2000 arrives, the stock market goes through a roller coaster routine, currencies continue to head south, excepting of course the mighty US $, the gold price falls and yet, hidden around the ever diminishing planet earth, are some substantial losses that have not yet appeared. So far there appears to be very little fear and no sign of panic. What gives?
Do losses no longer matter? Let us revisit 1997 again, the time when Asian currencies and stock markets both headed south, in tandem and although recoveries have taken place in stocks, albeit limited recoveries, the currencies, with a few notable exceptions never really recovered. I think the most memorable photo I saw during that period was that of a group of Korean housewives donating their gold jewelry to the government to help out. Jolly decent of them I thought at the time.
Now here we are three years later. The currency debacle continues on an ever increasing basis, including the pound, the Euro, the Aus dollar, the Kiwi dollar, the French franc, the German mark and so on. The difference this time, as compared with 1997, is that in most cases each of the countries that have a serious problem with declining currencies have stock markets that appear to be holding up quite nicely. Meanwhile in some local currency terms the gold price is doing very nicely, thank you very much. The mining stocks aren't, but that's another story. So, what gives?
If you bought shares in the top Australian stocks 1 year ago when the currency was at 65 cents US (now at .53, having fallen from a peak of .81) and the ASE was at 2800, (now at 3187) and you were using US $'s to do it, (keep in mind that at least 50% of the ASE is offshore owned) you have not done all that well. While the index has advanced some 14.5%, the currency has fallen 18.5%. Meanwhile gold in Aus $'s has risen from AU $476 to Au $513, a nearly 8% increase, fancy that. So, depending on what you own and when you bought, financial life in Aus $'s is fraught with danger. I guess a 4% loss for the year is not too bad when you consider the performance of the Nasdaq year-to-date, even the DOW for that matter. But that 4% loss has been incurred while a stock index has risen 14.5%!
If one had gotten smart and hedged the exchange risk, then somebody is holding an 18.5% loss on your hedge. If that entity has not hedged that position (as in found another sucker) I would be surprised. But how could you hedge against a falling Aussie dollar? What would be the plan? Would it include a complex stock/currency hedging strategy? LTCM where are you?
How do you disguise an ongoing loss? When do you actually report it to whomever you are responsible to? Who is in charge? Where are Abbott and Costello when you need them?
To a large degree the same thing is happening in Europe. The Euro is now at 85 cents US having started out at 115 cents, a 26% decline. As for the European stock markets, well the Dax as an example is currently at 6600. Last October it was at 5000, then it peaked at 8000 and has now declined 1400 points from that peak. That's a 17.5% decline. The German mark has declined from a peak of US 55.65 to 42.60, a 23.5% decline. If you own stocks in German companies, then you have been hit twice. Both stocks and the currency have declined. Gold in German marks is at 630 marks per ounce, a level not seen since 1994 and well off its lows. France has not fared much better, its stock index has fallen 11.5% from its peak and the French franc has fallen 23% from its peak. Gold has risen accordingly.
German, French, and Swiss (in spite of their Central Bank) holders of the yellow metal have done quite nicely this year. These examples are by no means the only ones. In most currencies that are not pegged to the US $, the gold price has risen in local terms, while currencies and stocks have declined. Given the current strength of the US $, countries that have currencies that are pegged to it must be concerned about there increasing lack of competitiveness in a very competitive market. Will Hong Kong devalue? What about the Chinese? Will they stop stealing missile secrets and "nuke" the currency markets instead?
The losses that have been incurred as a result of currency devaluations are not showing up as one would expect. Where are the stock market declines one would expect to see when currencies start depreciating at a relatively rapid pace? Who is holding these losses? Is the October phenomenon running late this year?
Gold does not declare a 10 for 1 reverse split as some Nasdaq listed dot.coms have done of recent times. Once you own physical metal, it does not have to be watched every day to see if its lost weight, gone out of business, lost its listing, failed to report on time, or subjected itself to the humility of name your own price.
In turbulent times it is still the best protection there is. When the US $ begins to decline, which it will, then US holders of the metal will, compared to their stock market loving counterparts, benefit the most.
The Prof can be contacted by email at firstname.lastname@example.org
Copyright by Professor von Braun. All Rights Reserved. Reprinted at USAGOLD by permission.
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