Avoid worrying about the NZD/USD exchange rate when buying gold

An article on Stuff.co.nz this week was headlined “Bullion bullish but beware the bears”.

The excerpt below is taken from the beginning of the article (emphasis added is ours):

The price of gold, now near nominal highs at more than US$1180 an ounce, is expected to climb further, analysts say.

However, they warn New Zealand investors should be wary of exchange rate fluctuations.

Fund manager Liontamer, a specialist in capital protected funds, said the price could rise more than 15 per cent to over US$1400 an ounce by December 31, and continue rising well into 2011.
Investment manager Sean Butler said there was fundamental support for the gold price at current levels. “Central banks in China, India and Russia continue to buy gold, and investors are building up their gold exposures in the wake of global market uncertainty and the risk of higher inflation.

“In the meantime, the supply of gold is tightening. A combination of reduced supply and the large set-up costs associated with setting up new mines is helping to set a new floor under the price of the precious metal,” Butler said.

OM Financial senior dealer Kevin Morgan said the price “could be comfortably above US$2000 an ounce within 18 months”, but saw a possible dip to US$1050 in the next two months.

“I would view that as a buying opportunity,” Morgan said, but cautioned anyone investing in gold to remember that it is priced in US dollars and subject to currency fluctuations.

“A New Zealand investor who purchased gold in early 2009 at US$900 an ounce would actually be losing money despite gold being 25 per cent higher at US$1200 an ounce today.

“The reason for this is that back in early 2009 the NZD [New Zealand dollar] was trading at about 0.5 to the USD [United States dollar] and today we are trading closer to 0.72,” he said.

No counter party risk:

Talk about over complicating things!  Firstly, Liontamer’s new fund - as also discussed in this Otago Daily Times article - uses derivatives to track the gold price.  It doesn’t actually hold bullion.  While it does offer capital protection -  i.e. you will get back at least 100% of your money at the end of the 6 year investment period – this is also achieved using derivitivisation.

The reason we choose physical gold is because it has no counterparty risk.  This simply means we are not relying upon another party to remain solvent to get our funds back one day.  If we buy physical gold and take possession it is ours and ours alone.  Our only risk is keeping it safe from prying eyes and thieving hands.

The price of gold in any currency is volatile!

Secondly is the point that as per the Otago Daily Times article “the Liontamer index follows the movements in the international gold price and is not affected by currency [movements] between the New Zealand and US dollars.”

The stuff.co.nz article also mentions how Kiwi investors should be careful as gold “is priced in US dollars and subject to currency fluctuations”.

The thing is you don’t need to invest in a fund tracking the international/US dollar gold price using derivatives to handle currency fluctuations!  All you have to do is track the NZ dollar gold price yourself (simply the USD gold price converted to NZ dollars by the current USD/NZD exchange rate) and ignore what the media says about the US dollar gold price!  We live in New Zealand not the USA!  (As a bonus, you’ll also avoid paying fund managers fees!)

Best time to buy gold

If you believe gold remains in a bull market (or rather that paper currencies are still in a bear market), then the time to buy is when the NZD price of gold has fallen not when it is soaring.  This can be an emotionally difficult thing to do but this gets you the most bang for your buck – or rather the most ounces for your dollars.  You don’t actually need complex financial instruments and hedging with futures contracts to achieve this.  Just buy when the price has fallen as this is likely to be when the NZ dollar is strong.

NZD Gold 3 Year Chart - Buy the price dips

Do this on a regular basis and the average buy price will be at a good low level and allow for maximum upside and you should hopefully avoid the heavy feeling of watching the price drop sharply just after you’ve bought.

In the above 3 year chart you can see that the NZ dollar price of gold has just dipped down to the 200 day moving average (the red line).  Over the past 3 years this has generally been a good time to buy, with June last year being the only time the price fell substantially further below the moving average.

Our website has gold price graphs from 1 day all the way to 40 years – all in NZ Dollars.  (See Gold Survival Guide Gold and Silver Price Charts.)  The 1 year, 2 year and 5 year charts are particularly useful in seeing where the current price is compared to the past and can help identify when the price dips.

Anyway, that’s just our opinion and as always we offer it freely - but with no guarantees!

Silver Price Charts: What Can They Tell Us?

An NZ Video Guide to Investing in Silver: Part 2

Here’s the second video in our new ”Gold and Silver Videos”  category.  The first video An NZ Video Guide to Investing in Silver covered a range of topics on silver investment.

In this video “Wild Bill” (who also writes our “Weekly Wanderings” column every week) returns and hones in on silver’s price performance with a discussion of US and NZ silver price charts, including:

• Silver’s performance over the past 10 years in US dollars
• Charts of Silver in NZ dollars versus Silver in US dollars
• A look at silver’s performance versus gold
• Taking the historical price movements into account, how best to purchase silver
• The gold/silver ratio and how to use this measure as a trading strategy

Please post a comment below and let us know what other topics you’d like to hear more about in future videos…

Could NZ house values drop by 80%?

Past data shows they sure could when priced in gold.

As usual there’s plenty of discussion in the mainstream media about where house prices are going. Given New Zealanders predilection for property it’s no surprise. However the prices used are always and only the nominal NZ dollar prices. And as discussed in this previous article, The Current Stage of the New Zealand Real Estate Market, it’s important to take into account money supply inflation and its impact on the buying power of the dollars you hold, when looking at historical returns.

So we’ve gone to the trouble of plotting NZ house prices against NZ gold prices to hopefully show house prices in a new light….

The below graph depicts the commonly publicised median house price (orange line and right axis). But also the house price to gold price ratio (black line and left axis) since 1962. This is calculated by dividing the median house price by the monthly gold price in NZ dollars. We then arrive at the number of ounces of gold required to purchase the NZ median house.

As it’s difficult to get long range median house prices, the prices were calculated using RBNZ house price index data and extrapolated backwards using the current median house price. Note: the index is for detached houses only. So while not perfect it should give a general indication of the trend in NZ house prices.

We couldn’t find NZ house price data back to the 1930s and earlier like the US and UK graphs care of bullionvault below. (The accompanying articles for the US and UK graphs on bullionvault can be found here and here.)

And while the UK and US data refers to average (not median) house prices, ‎we think we can still use the data to draw some broad comparisons.  So ‎please forgive our mixing apples with oranges!  Hopefully the resulting fruit ‎salad still makes sense!

Comparing the UK (above) and US (below), notice how towards the end of the 2 biggest recessions of the previous century – one, the deflationary depression of the 1930’s and the other the inflationary 1970’s – the ratios both dipped below 100 oz to purchase the average house.

While our NZ data doesn’t go back that far, notice how similar the NZ graph is to the UK data since 1962. Both peaked around 1970 at near to 300 ounces. Both then fell to below 100 in 1980 and climbed steadily with a bit of a stumble in the 90’s, to peak in the mid 2000’s.

So we reckon it’s probably reasonable to assume that the trend was similar during the 1930’s depression era here too.

Now, referring back to the NZ graph (reproduced again below for ease of comparison), note how at the end of the 70’s the housing/gold ratio drops down to almost 50 oz of gold to buy the median house!

If history repeats and the trends in the US and UK are similar to NZ, could we in fact be heading down close to 50 ounces again by the end of the current financial crisis?

Also worth noting is that while house prices in NZD terms peaked in 2007, priced in gold they had already topped out in 2005. So, at first glance it may seem like you’ve “missed the boat” if you didn’t sell housing and buy gold in 2005 when the top was in at 500 oz. With the ratio currently standing at about 250 oz you would have been able to buy back the same house now and still have 250 ounces left over. Or put another way you could now buy 2 houses. That is, twice the buying power in real estate by holding gold for 4 years.

However if we consider that in the 70’s the ratio bottomed at 50, this is a further 80% drop in the ratio from today’s value!

Key point: It’s the proportional drop that is the key factor.

So an average house sold today would net you 250 oz of gold. If the past trends both here and in the US and UK hold true, we may see the ratio drop below 100 and here in NZ maybe even bottoming out as low as 50, by the end of this financial crisis. That would mean you could buy back the same house for 50 ounces of gold and still have 200 ounces left over. Or using the same analogy as above you could now buy 5 houses! Even if the ratio only dropped to 100 ounces you could still buy the same house back twice and have 50 oz of gold left over.

Bear in mind that this drop against gold could happen without house prices actually falling in nominal NZ dollar terms as well but merely just through expanded money supply holding house prices up – i.e. the kiwi dollar being devalued. For example, for the ratio to bottom out at 50 the median house price could remain at the current price of $360,000 and gold could rise to $7200NZ (i.e. $360,000 / 50 = $7200). Notice how in the 70’s housing actually went up for the whole decade in dollar terms (orange line) while falling for the decade in gold terms (black line).

Or you could have gold holding steady and nominal house prices dropping markedly. With NZ gold currently at $1,585, the current median house price would have to drop to $158,500 to return just to 100 ounces! Ouch!

But perhaps the more likely scenario is to have a combination of the nominal dollar price of housing falling and gold rising. For example, gold at $3000NZ and the NZ median house price dropping to $300,000 would result in a 100 oz ratio.

Anyway, if history at least rhymes a little bit, holding gold should result in improved buying power when it comes to real estate in the coming years, whichever of the above scenarios play out.

So to summarise:

1. When priced in gold the NZ median house peaked in 2005 at 500 ounces.
2. Since then it has fallen 50%
3. UK and US data shows the ratio dipped below 100 ounces after the 1930’s depression and 1970’s inflation.
4. Past NZ data shows the ratio reached a low at the end of the inflationary 1970’s of just over 50 ounces. This is a further 80% drop from today’s ratio of 250 ounces.
5. It might be hard to time exactly but when houses priced in gold are below 100 ounces it might be a good time to think about exchanging some gold for property.
6. Hint: To do step 5 you need to have some gold!

Note: We’ll be updating this data every few months and publishing the changes so if you want to stay informed about when NZ housing will again be good vaule, then sign up for our email article updates in the box at the top right of this page.

Carry Trades, the New Zealand Dollar and Gold

Weekly Wanderings 21 October 2009

This week the US dollar carry trade, gold and scary charts!… 

Each week over at MaxKeiser.com, Max and Stacy present a radio show entitled “The Truth about Markets”. There are at least two variants of the show, with one slanted towards Christchurch (New Zealand) listeners. In this WW, I summarize the points discussed this week in the show.  (The full audio can also be downloaded here.)

(1) Carry Trades. The idea of a carry trade is to fund one asset by selling short or borrowing one currency or asset that is hopefully decreasing in value, and to use the proceeds to ‎buy another asset that is hopefully increasing in value. New Zealand has been strongly affected by the Yen carry trade, in which large amounts of yen were borrowed at essentially zero percent interest and used to buy the kiwi (NZ dollar), which yielded a high rate of return because of our high interest rates here.

(2) There used to be a Gold Carry Trade, in which gold was borrowed from Central Banks, again at very low interest rates, then sold, and the proceeds used to buy other higher yielding assets, such as US Treasury bonds. When Barrick Gold announced recently that it was dehedging or closing its hedge book, this was seen by many observers as a signal that this version of the gold carry trade was essentially finished.  (See this previous article for more on the Barrick dehedging: Professor Fekete: Why Barrick Gold has ended Gold hedging)

(3) One powerful effect of the gold carry trade was to artificially suppress the market gold price, thus creating downward pressure on it. Possibly the announcement by Barrick also contained a subtle signal from the powers that be that the price of gold would henceforth be allowed to move more freely.

(4) The US dollar is now, and has been for the last 12 months, available to borrow at essentially zero cost, indicating the beginning of a new US Dollar carry trade, and is now being used to buy other perceived higher yielding assets (like the resource currencies - the Australian, New Zealand and Canadian dollars). There is evidence that gold is a beneficiary of this new carry trade, and certainly there is now upward pressure on the gold price, and concomitant downward pressure on the value of the US dollar.

(5) Other upward pressures on the gold price include the existence of the exchange traded funds, GLD for gold and SLV for silver, which, although they are problematic to some extent, provide an easy way for the general public to invest in precious metals.

(6) Central banks around the world, most notably the Chinese, are buying gold in increasing quantities.  Chinese officials have announced that every time the gold price sinks below a certain level, they will be a buyer, thus giving rise to the notion of the Beijing put, analogous to the so-called Greenspan put. The effect of this is to create a floor under the gold price.

(7) This new dollar carry trade could be derailed, if the US authorities were to raise interest ‎rates substantially. However one powerful reason that this is unlikely to happen over the next couple of years at least, is because of the large number of ARMs (adjustable rate mortgages) in existence, whose rates would then have to be reset, dealing another crippling blow to the housing market.

(8) Speaking of interest rates, the RBA (Reserve Bank of Australia), has just chosen to raise ‎interest rates. Well known Australian economist Steve Keen suggests that this is a ‎serious error, because there is a housing price collapse yet to occur. We observe that one ‎thing is certain: if Aussie housing prices were to collapse, NZ house prices would definitely ‎echo that trend.‎

(9) Once the US dollar has assumed this role as a funding currency for carry trades, there is ‎consequently tremendous pressure on its legitimacy as the world’s reserve currency, ‎since its value is continually being forced down by the carry trade. This is one reason that monetary authorities around the world are calling for a new reserve currency. In ‎fact, gold is now unofficially assuming that role.‎

(10) Monetizing the debt. Another thing that has worried foreign holders of US ‎dollars is that the US would start to monetize its debt, meaning that yet more dollars ‎would be created, thus further weakening the dollar. Bernanke promised he would not do this; however Zero Hedge has alleged that at the Treasury and Agency Bond auctions ‎this week, within 30 minutes of the issue and purchasing of Fannie Mae bonds, they were ‎sold on to the Fed…. If this is in fact the case, then foreign holders of large amounts of US ‎dollars (e.g. China) have every reason to be agitated.‎

(11) Over the past few years, whenever the dollar has weakened to a significant ‎extent, there has been co-ordinated action by central banks to force its value back up ‎again. This does not appear to be happening this time around….

(12) We are very likely to be at the beginning of a period of sharply increasing ‎volatility in the values of currencies, including gold.‎

Thank you, Max Keiser and Stacy Herbert

 

Now we would like to draw your attention to some alarming information, courtesy of Weiss Research.  (You can sign up for a free eletter on their Money and Markets homepage.)

The charts speak for themselves….

 

Hear the word I-N-F-L-A-T-I-O-N anyone?

This insatiable demand for commodities from a rapidly growing China is only ‎going to continue to increase…….

GOT GOLD?

INVESTING IN NATURAL RESOURCES?

DIVESTING YOURSELF OF US DOLLARS?
  

Buy gold in New Zealand - Is now a good time?‎

With Gold having reached a weekly closing price over $1000 US for the first time in ‎history on Friday 11 September and being less than $30 off it’s all time high, is it ‎currently a good time to buy gold in New Zealand?‎

We have written in our FREE eCourse (which you can access here) how the time to buy is on dips ‎not when the gold price is reaching or close to reaching new highs, so that would ‎indicate that this isn’t the best time to buy gold.‎

But, while that might be the case in the U.S., here the New Zealand dollar gold price ‎tells a different story.  Just look at the following 1 year price chart…‎

Clearly, February this year was not the ideal time to be buying gold in New Zealand dollars as it topped out.  This was also when the NZD reached a low against the USD as per the 1 Year Chart below:

The US Dollar generally moves inversely to the (US Dollar denominated) gold price, while the NZD - as a preferred resource currency - generally also moves inversely to the US dollar.  So, the exchange rate plays a major role in the NZ dollar gold price.

The below table shows the annual percentage change in the gold price for 10 currencies during the last eight years of the current bull market in gold. 

Annual Percentage Change in Gold Price
	USD	NZD	AUD	CAD	CNY	EUR	INR	JPY	CHF	GBP
2000	5.7%	11.6%	10.6%	2.2%	5.8%	7.0%	1.2%	5.6%	4.7%	2.1%
2001	2.5%	9.1%	11.3%	8.8%	2.5%	8.1%	5.8%	17.4%	5.0%	5.4%
2002	24.7%	-1.0%	13.5%	23.7%	24.8%	5.9%	24.0%	13.0%	3.9%	12.7%
2003	19.6%	-4.5%	-10.5%	-2.2%	19.5%	-0.5%	13.5%	7.9%	7.0%	7.9%
2004	5.2%	-4.1%	1.4%	-2.0%	5.2%	-2.1%	0.0%	0.9%	-3.0%	-2.0%
2005	18.2%	24.4%	25.6%	14.5%	15.2%	35.1%	22.8%	35.7%	36.2%	31.8%
2006	22.8%	19.4%	14.4%	22.8%	18.8%	10.2%	20.5%	24.0%	13.9%	7.8%
2007	31.4%	21.5%	18.6%	10.4%	23.0%	17.9%	17.5%	24.7%	21.5%	29.2%
2008	5.8%	20.0%	32.5%	32.4%	-1.1%	11.9%	30.4%	-14.9%	0.2%	44.3%
Average	16.3%	12.8%	13.3%	13.6%	13.5%	10.8%	16.8%	13.6%	10.6%	17.1%

You can see that while there is significant volatility year to year in every currency, the overall change in the past 9 years has been very consistent.  At a 13.8% increase on average per year it has also been large!

The chief point to take away from this table is that all currencies have been devalued compared to gold, and on a remarkably similar basis.  Gold has gained by over 100% in almost every currency over the past decade.

So if you are a long term holder you have made good gains or rather protected your original capital well.  So the question remains, is now a good time to buy gold as a New Zealander?

If we look at the longer 2 year price chart for NZ dollar gold we can see that the price is now back around where it was a year ago just prior to the panic surrounding the Lehman Brothers collapse.  So overall we think this is a good time to be buying gold in New Zealand.

As we’ve already mentioned the NZD/USD exchange rate is a big factor in the NZ dollar gold price.  While the “Kiwi” may still strengthen further from here, this is also the time of the year when the US dollar denominated gold price usually strengthens which could negate much of any further NZD strengthening.

Could the price drop further yet?  Yes, as the graph shows it may yet drop back to the longer term trend line at about $1300, but we would much rather be buying gold at the current price than anything else for the last 8 months.  We still believe we are in the early to middle stages of this current upwards gold price cycle.  We discuss this further in an earlier article.  Refer to the last 3 paragraphs here. 

So, if you buy gold in New Zealand dollars now we don’t think you’ll regret this in the years to come.  A minimum of 5-15% of your assets should be allocated to physical gold.  We also discuss this in more detail in our Free eCourse.

NOTE: You can go to our Gold Prices page to see the very latest Silver and Gold prices in both NZ and US Dollars along with their respective gold charts.  For a complete list of all our articles go to the “Sitemap”.

Why the Reserve Bank of New Zealand (RBNZ) will eventually print money…

(and why they will everywhere else too if they haven’t already)

June 2009 news headlines highlight the ongoing strength of the NZ Dollar (kiwi). Having risen from a low of just under 0.50USD in March 09, the kiwi reached a high of 0.65USD less than 3 months later. A rise of some 30%!

The high dollar makes New Zealand’s exports more expensive for other countries to buy. When also coupled with the price of key commodities, such as milk solids’ falling, kiwi exporters are really hurting.

Exports make up about 30% of the New Zealand economy, and falling export returns mean less income for the country. This has a flow on effect of less spending, both investment and consumer, the end result eventually being higher unemployment.

The high dollar hasn’t escaped the notice of the country’s leader either, with a recent Bloomberg article titled “Key says New Zealand Dollar gains may derail recovery”.

The last thing politicians want is high unemployment as the unemployed vote too - and usually not for the incumbents.

Furthermore, the NZ dollar is strong despite the RBNZ currently having the lowest interest rates ever (2.5%). Usually a low interest rate will result in a lower exchange rate as international investors look elsewhere for higher returns on their money.

But the fact is that in a worldwide recession (or maybe depression) almost every other nation is facing the same problems of:

- less demand for the commodities or goods they produce.

- high debt

And they’re also trying to solve this with low central bank initiated interest rates.

So what does this hold for the future?

While Reserve Bank Governor Alan Bollard has been and will do his best to “jaw bone” or talk down the dollar, this has very limited effect. Even John Key in the above quoted article admits there is a limit to what current monetary policy can do.

This is why we believe it is virtually a given that at some point in the not too distant future the RBNZ will initiate a “quantitative easing” policy as the likes of the USA, UK and Europe have already done.

Quantitative what?

Quantitative Easing is Reserve Bank speak for money printing or money creation.

The aim is to water down or devalue the currency, thereby making the nation’s exports cheaper to foreign buyers. Basically if more of a currency - i.e. the Kiwi dollar - exists, this means it will take less foreign currency to purchase New Zealand products.

However this is a very definite double edged sword. As while exports may get cheaper, it will also have the effect of reducing the buying power of the NZD and making everyday goods such as food and fuel more expensive for the average citizen.

The major problem with this “solution” is that it’s likely that every other central bank will be trying it too. The name of the game is “Competitive Devaluation”. Something like the limbo stick for Central Banks – “How low can you go?”

So any benefit is likely only to be temporary until the next country also devalues.

So if everyone is trying to make their currency cheaper where will it stop?

As more and more paper currency is created worldwide the likelihood is that we will see very high rates of inflation. More paper dollars chasing the same amount of goods equals higher prices for those goods.

And if the money makers go too far, we may potentially even see hyperinflation in developed nations. Renowned investor and writer Marc Faber says they’ve gone too far already and hyperinflation is 100% guaranteed in the US.

While this may be hard to believe when all you hear is the talk of deflation in the mainstream, just remember it was the same mainstream that said the sub prime mortgage problem in the US was contained and only going to be a minor blip.

For a reminder of the effects of inflation, have a look at the below graph care of the RBNZ website which shows the 93% loss of purchasing power of the NZ dollar since 1967. $1.00 from 1967 is equivalent to less than 10 cents in purchasing power today!

If we had to draw a line on this graph for the coming years, our pick is that it will slope steeply down to the right again just like it did in the 70’s.

The signs are there if you want to read them and they say: ‘Warning: High inflation and high interest rates ahead”. Ignore them at your peril…

 

Like to know how you can protect yourself from this potential outcome? Click here to learn more about our free 8 part eCourse.