Hello Maurice, a cyber pen-pal of Indian extraction, we will refer to him as Gumnam, apparently meaning Annonymous in Hindi, wrote the following thoughts that I had trouble responding to:
Hello Jay
…I … for the last 6 years and currently have been working … trading bonds and currencies.
… Also the other thing that is bothering me is the example of GFI, drooy and all other South African gold producers. I have been long these "cowardly soldiers" from good levels but I saw them getting destroyed over the last few months. There are various reasons for it but essentially the price of Gold in SA Rand is less than what it used to be last yeareven when Gold was 270. The weaker dollar is completely offsetting the effect of higher commodity prices for all these PM producers.
If you take this and extend the analogy, the same CAN and WILL happen to BHP, RIO and all commodity producers based outside USA , because their cost of producing will be denominated in their local currencies but the revenue is in USD. All non US commodity producers will suffer decliing margins. The companies based in US for example Newmont (wihch produces sizable production in US) are clear winners - USD cost and USD revenues.
Why only Gold? The same phenomenon can happen to any exporter based in Asia or Australia or NZ who has sizable exports to US. They will not be able to increase the dollar price of their goods as fast as their currency appreciation. If the script plays the way you write it, and the way I understand it, equity markets all over the world will be doomed, atleast as long as USD continues its move down. In fact the only companies that might do well will be the one producing in US. ( I am talking about strictly commodity type producers, not the tech stocks and other wishful stocks).
Even if commodity prices increase faster than USD depreciation, the argument will not change much because the foreign producers will not be able to benefit from full commodity price appreciation.
So if you want to buy Gas producers, you want to do it with US producers rather than CanRoy - if US NG prices go up and CAD goes to 1.20, CanRoy will not provide the maximum bang for the buck as their costs will remain in CAD and revenues in USD.
Chugs, Jay |
