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I’m still a bear in the US. In an article I wrote some weeks back I mentioned that the US bond market was pointing to about a 50/50 chance of recession next year in the US. What is the best way to position yourself to play this potential scenario of a US recession? As a hedge against recession in the US, especially in a higher inflation environment a good strategy would be to increase exposure to gold. Gold retains value in an environment where the actual value of cash is falling, and as investors look for a ‘flight to quality’ as share prices struggle, the yellow metal becomes more attractive. Students of Wealth Strategies will know something of intermarket analysis and will be aware that a falling US dollar contributes to rising commodity prices.
click chart for more detail
The US dollar is certainly getting weaker as the chart of the US dollar index above indicates (and the noticeable relative rise in the Australian dollar also implies). This acts as a help and a hindrance. First, gold will increase further in price as domestic demand expands, whilst the purchasing power of international investors is magnified through the strength of currency crosses.
For most Australians, however, taking on gold exposure in the US (by buying gold futures) has a negative association. The erosion of value through currency risk when repatriating profits generated in the US makes the whole process pointless. Catch 22! The best answer? Look for opportunities in Australian shares (or CFDs) that have some ongoing gold concerns. In the resources sector there are more than a few options.
Lihir Gold (LGL), which trades on the ASX, is a good place to start. No long opportunity has presented itself as yet, but certainly this company should be placed on a watch list. Judging by the relative strength comparison (RSC) found in ProfitSource software, LGL has been underperforming gold futures for the course of this year. There are some internal problems within the firms’ operations which will have contributed to this situation, but the increased price in gold should eventually translate to increased prices in the shares.
click chart for more detail
The RSC tool is simply comparing the change in prices of LGL to the changes in prices of physical gold. Simple gold future prices have been rising more rapidly than LGL share prices, a phenomenon represented on the lower chart by the blue bearish resistance line showing a downtrend for the last 12 months. Should that line become horizontal, LGL’s fortunes will be following those of gold. The logical inference, therefore, is that if you are bullish on gold, there’s going to be opportunities in Lihir!
Stay Sharp
John Jeffery
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