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Economics
Bulls still in favour of gold and the AUD/USD
September 18, 2008
Clifford Bennett, Chief Economist, Sonray Capital Markets

We have consistently maintained our view that the US financial crisis would intensify as a result of continuing downward pressure on home and property values across the country. After Bear Sterns it was no secret that Lehman Brothers could be next. While some very sound efforts are occurring to prevent the domino effect from rolling on, Merrill Lynch has got out of the way by jumping under Bank of America, a further intensification of the credit crunch is likely. The outlook for the broad US economy just got a whole lot worse.

Meanwhile the almost forgotten tremendous growth in China continues. Yes, there will be some slowing of the Chinese economy along with the rest of the world, but we should not underestimate the sheer size of the domestic economy. If China were to slow to 8% or 7% GDP, probably a worst case scenario, it would still be purchasing commodities at a pace that Australia will have trouble keeping up with. It is also very likely that Asia in general will do better than current market expectations. So while there are good reasons for caution on markets today, particularly equity markets over the next couple of days, there are opportunities.

Gold is the ultimate reserve currency, and even more so when the cause of the economic crisis rests in the financial system itself. Along with all the other winding down and significant reversing of previous bets in currency and commodity markets over the last month, Gold has been sold down 27% from its March high. The long term outlook for Gold has remained bullish, and as with the Australian dollar it just needed a significant catalyst to turn. Gold has bottomed, and is likely to head higher over the next few days. Expect some selling pressure as already seen around US$785 US$792, but our short term target is US$835. Gold is capable of a near term rally to US$860.

The Australian dollar has fallen further than I ever anticipated, but as continually argued through this sell off, the fundamental bullish story has never changed, except for a reduction in rates. The likely outcome, of a lowering of rates to 6.5% or 6.0%, still leaves the Australian dollar with a great yield advantage. Australia’s yield advantage over the US is dropping from “spectacular” to just “fantastic”. Yet with a market caught fully long the Australian dollar, remember all the major banks and investment banks changed their Australian dollar forecasts to the same as our parity call very late in the piece, the RBA reversal was enough to trigger massive position exiting. A serious correction has certainly occurred, but here is the key, it was a correction.

The long term fundamental outlook for the Australian dollar remains extremely bullish on the basis of a domestic soft landing, continued strong export demand, and continuing high interest rates. Commodity prices such as Gold are also likely to recover in price in the months ahead.

Our long term forecast of parity, albeit delayed to 2009, remains in place. Our previous US$1.08 target for 2009 has now moved to 2010. As for the short term outlook, post Lehman, its going to be volatile but the pressure to the upside against a weakening US dollar should be sustained. Medium term target is 88 cents, with 92 cents possible by year end.

Clifford Bennett, Chief Economist, Sonray Capital Markets.

Disclaimer: This recommendation has been issued on the basis that it is only for the information and exclusive use of the particular person to whom it is provided by Sonray Capital Markets Pty Ltd ABN 18 104 482 993, AFSL 231151. These recommendations are current as at the date of issue. Past performance is no guarantee or reliable indication of future results. Trading in derivatives may involve a high degree of risk and significant loss, and is appropriate only for persons who can assume risk of loss in excess of funds deposited. This recommendation is of the nature of general information only and must not in any way be construed or relied upon as legal, financial or professional advice. No consideration has been given or will be given to the individual investment objectives, financial situation or needs of any particular person. The decision to invest or trade and the method selected is a personal decision and involves an inherent level of risk, and you must undertake your own investigations and obtain your own advice regarding the suitability of any investment for your circumstances. Although the information in this recommendation has been obtained from sources considered and believed to be both reliable and accurate no responsibility is accepted for any opinion expressed or for any error or omission that may have occurred herein.