Thursday, October 8, 2009

Commodity investing for non-US investors

In investing, market participants need to think through the implications of an investment theme before taking action.

Here is a case in point. There are headlines everywhere about gold prices hitting all-time highs. While that is certainly true when gold is viewed in US Dollars, it is not true when you look at gold prices in euros, Yen or other currencies.

This problem is particularly acute for investors based in commodity producing countries. The recent decision by the RBA to raise interest rates sent the Australian Dollar soaring. The Canadian Dollar, another commodity currency, also rose in sympathy. Australian and Canadian investors in gold saw prices rise, but not to the same degree and prices are certainly not at all-time highs.

In this case, investors who wanted to bet on a rise in commodities should have been betting on the rise in USD. Problems with the US economy, its current account and fiscal deficit, are well known. If inflation was going to show up, it would have been in commodities and USD weakness. The correct action for non-US investors who believed in this macro case would have been to buy commodities and hedge their currency exposure.

Think through the scenario before you act.

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