The dollar is king, but I’m betting against it. “What a difference a year makes,” a recent article on the US dollar’s remarkable strength was headlined. Last year, the author noted, analysts predicted the greenback’s collapse, yet this year only the odd and muted voice of caution can be heard. Interest rates, the mantra goes, are in the dollar’s favor. While I share the consensus that rate differentials could help the dollar even further, I see things a bit differently. It’s a reality that financial markets look forward, and it’s highly likely that the Fed is nearing the end of its cycle of interest rate hikes. In other words, before long the US dollar will lose its key support pillar. And trouble looms on other fronts, as well. Temporary tax advantages on the repatriation of corporate profits, which have swelled capital flows toward US shores in recent weeks, will end December 31. And there are the massive US current account deficit and the deteriorating budget outlook to consider. In the first quarter of 2006, the Treasury is expected to borrow some $170 billion. Dollar bulls feel that most of the new debt will as always be gobbled up by enthusiastic foreigners and perhaps they’re right. Even so, for my taste the dollar’s fundamentals are too negative to justify an optimistic or even neutral opinion. Any further strength should be used to diversify into other currencies. What to buy? I think the Euro will make a moderate comeback in 2006 and I expect the commodity currencies to continue rising modestly further. However, my biggest hopes for next year are for Asia, where solid economic fundamentals may push currencies much higher. December 5, 2005
Gold has vaulted above the important $500 mark, but gold mining shares are acting poorly. The junior segment, in particular, is lagging behind. Through the first three calendar quarters, less than a handful of juniors yielded a positive return, and so far during the fourth quarter the average junior stock has barely managed to return to where it started the year. Why? Mostly because the gold mining industry is confronted with a sharp rise in costs. For junior firms that can prove particularly devastating, because ever higher gold prices are needed to eventually break even, while limited supplies of working capital get eaten up ever faster. Most intermediate and senior producers have much deeper pockets, but rising production costs have taken a toll here, as well. I still like the Midas metals’ long term fundamentals, but taking some profits in gold shares is now probably a good idea. December 5, 2005
URANIUM/ NUCLEAR POWER
Britain’s Prime Minister has announced his support for new nuclear power stations. Expect similar announcements in other G7 nations and, even more so, in the developing economies. China and India have already approved the construction of several reactors, but given their increasing dependence on stable energy supplies, additional sites will need to be developed. In the US, meanwhile, the last nuclear reactor project was approved in 1978 and the topic of nuclear energy is politically taboo. Eventually, high energy prices will force Washington to rethink its approach, but for purposes of this discussion America doesn’t matter. What I’m leading up to is this: many new nuclear power plants will be built during the next two decades and uranium is in tight supply. I predict that ten years from now the uranium price will be a much bigger story than the oil price. December 5, 2005
Will copper keep climbing? In my opinion, far too much has been made of the China copper scandal. If it was truly an agent of the Chinese government who incurred the alleged 200,000 tonnes short position at the London Metals Exchange, I suspect Beijing will live up to its commitment. It’s not that difficult for the Chinese to do that, either. Current government reserves of copper are estimated to be at least six times the disputed quantity, so that the short position can readily be covered. But remember, the Chinese are shrewd and seasoned commodity market operators, and while they’re at it, they may decide to go further than just make good on their obligation. What if Beijing’s agents actually drew down reserves for a few weeks and refrained from buying copper? That would seriously embarrass the hedge funds who hold huge speculative long positions. The bottom line: copper is hot right now, but it may cool off considerably in the coming weeks. December 5, 2005
Peter Cavelti’s background as a financial analyst and author spans 35 years and four continents. His grasp of global issues is extraordinary and his comments and books have been published internationally. He was president of Canada’s Guardian Trust and subsequently owned his own firm, which managed some of the best-performing natural resource mutual funds. Peter firmly believes that only an integrated understanding of geopolitical, demographic and economic events can lead to successful investing, and that is what his web service Perspectives is about. If you feel keeping on top of relevant global events takes too much time, Perspectives is for you. Whether it’s investment advice or political analysis, Peter offers his insights in concise and easy-to-read form. Best of all, Perspectives is free. Visit www.cavelti.com and sign up today!