AUDacity


It takes audacity to invest in the AUD.  Or does it?  Let’s look at how to make currency speculation less speculative.

Yesterday’s message looked at how on February 13, 2014, I recommended shares in TFS Corp at $1.06.  Within eight months the price had risen to $2.22.

Wow, was I right.

In that same February message I also pointed out that I favored the Australian dollar because it had fallen 12% against the greenback.  The AUD was worth US$.87 cents.  Since then, the Aussie has continued to fall.  Now it only takes .75 cents to buy an Australian dollar.

Wow, was I wrong!

Or was I?

Profit or loss depends on when one buys, but even more so also when one sells their investments. 

The February 2014 recommendation to invest in AUD was pretty good, in the short term.  During the eight months time when the TFS Corp shares skyrocketed, the AUD jumped up from US$.87 cents to US$.93 cents.  Traders who invest in AUD in Feb and sold in September make a 6.08% gain.  Since  traders usually leverage 10 to 100 to one, they made a fortune.

aud chart

AUD – USD chart at www.finance.yahoo.com

Then the Aussie dollar crashed versus the greenback and remains at a very low level.  Smart traders shorted in September 2014 and made even more.  They made a lot more.

Most of us are not traders. I certainly did not pick up either (the rise or fall) of these profits. I simply kept my Australian investments and will add more because I believe that the Australian dollar weakness creates long term value because the US dollar is still way too strong.

One factor distorting the dollar’s price is low interest rates in all developed countries.

interest rate chart

US interest rates are at their lowest rate in history.  This pushes investments into the US stock market. Excessive buying causes US share prices to rise, even though they are a poor value.  Rising prices attract overseas investors as well.  Worries about China’s economic slowdown and what Brexit will do to the EU and European currencies support this shift to over priced US dollar assets.  The dollar is strengthened as overseas investors sell their currencies to buy US dollars for investing in the US market.

These factors have kept the US dollar artificially rising above fundamental levels.  This is why my stock portfolio is composed entirely of non US dollar denominated equities.

The good value developed markets I hold are: Australia, Austria, France, Germany, Hong Kong, Italy, Japan, Norway, Singapore and the United Kingdom.  The emerging markets are Brazil, Chile, China, Colombia, Korea, Malaysia and Taiwan at equal weights.

Almost all of my equity portfolio are in country ETFs of these countries.   My speculations that spice up this portfolio are equities linked to silver and my shares in TFS Corp., the sandalwood plantation.

There is forex profit potential from the Australian dollar if given time.  The Australian dollar has been especially sensitive to the Chinese yuan and Brexit, so is likely oversold now.  There is a long term history of the AUD rising and falling every seven or eight years versus the US dollar.  A Golden Rule of Investing is: “Periods of high performance are followed by periods of low performance and vice versa.”

There is another benefit of taking advantage of short term distortions in a diversified long term portfolio.  The Australian shares in my portfolio benefit fundamentally from a weak Australian dollar because Australia is an export oriented country.  A weak currency helps exports.  The Sandalwood plantation TFS Corp. which sells a lot of its sandalwood to US companies should see extra profits due to lowered costs in US dollar terms.

This is one huge attraction to holding a long term, good value, globally diversified portfolio.  We can watch the underlying currencies and wait for short term currency distortions to provide extra profit.

On other words it does not take as much AUDdacity as it seems to speculate in the AUD.

One way to take advantage of this distortion is to borrow US dollars in a margin account to add good value Australian investments.

Gary

We’ll look at how to create safe, profitable good value portfolios using a lot of country ETFs based on long term fundamentals.  Then we’ll see how to blend in extra profit with a little bit of speculative shares based on short term distortions and how to borrow low and deposit high using margin accounts at the International Club retreat this August.

 


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