Why gold is a put against a falling NZ Dollar

Gold is down sharply this morning not that surprisingly having just touched over $1600 US an ounce.  Round numbers can often mean there is some resistance to break above them decisively.  (That said the last few round numbers $1300, $1400 and $1500 fell quite easily.)

NZ $1950 has been the ceiling for Gold since 2009

Here in NZ the number NZ$1950 has proven somewhat of a ceiling for gold.  That was the high back in Feb 2009.  It was only just bettered in March of this year and again the price got only  just above NZ$1950 in early May.  Obviously the high NZD has been the factor in limiting the local price.  There is talk of the kiwi dollar reaching parity with the USD which doesn’t seem too hard to believe.  Mr Key has been discussing the risk to NZ of further debasement of the USD, causing an even higher kiwi dollar and the impact that would have on our exporters.  And how he will be discussing that this week in his US visit to the two B’s – The Barack and The Bernank.  He hopes to get a read as to what might be next for US monetary policy.

We would give him a hint that it will be more of the same – the question will be but when.  (As an aside I wonder if John will discuss with the Bubble-man Bernanke the US$9 billion in currency swaps with the NZ reserve bank that the Bernank took a grilling for a while back?  Maybe he could ask if we can get some more?)

It’s an interesting time for Mr Key to be in the US with the hubbub over the US debt “ceiling” – which is more like a balloon than a celing since it has been rising for the past century.  It’s almost certain that they will again bump it higher as what’s another trillion here or there?

Risk to New Zealand remains China

However the risk to NZ remains China.  If China stumbles then that will dramatically affect Australia, and NZ and it’s currency will likely follow.

Holding gold is a “put” on a falling NZ dollar

That’s why we view gold as a kind of a “put” (in option speak) on the NZ dollar.  If things continue in the current trend and we buy during price dips or just “dollar cost average” and buy regularly, our worst case is our gold purchases hold value for now.  The long term trend remains steadily up.  Even if we bought at the exact NZ dollar peak in 2009 (which would have been unfortunate), our buying power is not down too badly.  Well no worse than cash anyway.  But if we had managed to instead buy regularly and especially during dips then our buying power will likely have increased.

The “Put” we mention is that if things deteriorate for NZ and the Kiwi dollar falls – like it did in 2008 – then this is where the big “gains” come.  Or rather this is where our purchasing power really increases.

Is this likely?  Who knows, picking currency moves is a mugs game we reckon.  We just like the look of the long term trend for gold (and silver)and so stick with it.  As always just our thoughts and make of them what you will.  We’re not afraid to say we are biased!

There’s 4 articles this week for you.  If you want to get your head around the “carry trade” which we haven’t heard so much about of late then check out “The Road to Perdition: inflation, US dollar/NZ dollar carry trade and more“.  This interview uses the NZ dollar as an example of how the carry trade works.

There’s also some thoughts on why gold and silver mining stocks are as cheap as they’ve ever been.  Plus 5 reasons why we’re headed for a “Greater Depression”.  And lastly an informative look from Darryl Schoon on 3 centuries of paper money and central banks, and why China may well be the cause of an eventually collapse of paper money.

Silver is down even more than gold overnight in NZD terms.  To give you an idea of how much silver can change day to day, this morning 1kg of silver is selling for $1631.88 (delivery included) vs $1704.28 yesterday.  A $70 dollar difference in one day!  So dollar cost averaging can be a good option as silver is very volatile and hard to time.

As always call David on 0800 888 465 for a quote or email orders@goldsurvivalguide.co.nz.

Have a great week.





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