The Currency Cup Floweth Over

As part of the Chinese proverb says, we live in “interesting times”. My business partner, Paul Gambles has a regular spot on CNBC and was speaking recently about currency fluctuations and investment on the TV Channel.

He opened with, “Investors ought to be looking at where currencies seem to be heading right now. At this part of the economic cycle, we think there are three assets that are strategically appropriate assets to invest in - one of them is gold, which we’ve been invested in for about eight years now. We think we’ve made most of the money we’re going to make on gold. Again as we’ve said before, we think that fair value for gold in today’s market is around USD1,600, USD1,700, USD1,800 range. We think the time to buy gold is in the USD1400/USD1500s, and we would be very happy to sell gold when it reached around USD2,000 like it did last year”.

Regular readers of this column know that we have been very pro-gold for many years now. In fact, we still think that gold can go above USD2,000 - maybe as much as USD3,000 dependent on how bad things get. However, the problem is that you can leave things too late. We fully expect gold, once having peaked, to come crashing down to around the USD1,000 mark or even less. It will then stay there for many years - basically, like the last gold cycle. Gold will then come back when, as Paul went on to say, “We move into the situation where we have fairly rapid inflation. We’ll probably have a fairly gentle inflationary recovery from the deflationary period we’re in now, but it’s probably twenty years from the bust until we see gold start to look like an interesting asset again. So, gold has been an interesting asset. There’s still some mileage in it but try and make sure you know where the exit door is. Treasuries bills and fixed interest again have been a very interesting asset for the last twenty years, but again, try and make sure you know where the exit doors are, but one thing that’s likely to come together is that we’re likely to see this peak in gold prices and treasury-bill prices coincide with a collapse in equity markets and risk assets, as we’ve said in the past, and currencies are likely to get very much caught up in that.”

In the longer term, we have got a view that the Baht should get stronger against the US Dollar. The reality of it is that the Baht is a much more attractive currency; growth rates are far higher in South East Asia; all the demographic reasons that support currency strength are much stronger in this part of the world. Also, if you look at the debt levels, Thailand has nothing like the debt constraints that America has right now. This is why we believe that, in the longer term, the Baht should quite clearly strengthen against the US Dollar.

Now, this will not happen in a straight line. There will be a whole number of things that could interfere with that trend, not least, politics, which is always a problem. However, at the moment, they seem to have more political problems in America than we do in Thailand, so maybe that is something to be grateful for.

Paul emphasized this when he went on to say, “I think that one of the key things, though, if we look at the world from a Thai Baht perspective is that when we enter into the last phase of the crisis as it were (and like anybody else I don’t know if it’s going to happen this year or next year - all I know is that we believe it’s absolutely certain to happen at some stage), America’s debt has to be dealt with at some point. Europe’s debt at some point has to be dealt with. Japan’s debt has to be dealt with, and that really means a big crisis resulting in an equity market collapse. We’re expecting equity markets to fall by at least 30%, possibly 40% globally, in the States but in Thailand as well. But at that point, in a liquidity crisis, a market panic and a market collapse, we’re also expecting there to be a real flight to the US Dollar. It’s the easiest currency to buy. Wherever you are in the world and whatever you’re selling, the US Dollar is the easiest currency to go and buy.”

In 2008, we gave a prediction at the start of the year that we saw Baht moving back up. Before that, the trend had been the Baht moving down from the low 30s and possibly slightly lower. We thought the Baht would move up to something like 35, but it actually went up to around 36.

We think that the 2012/2013 period could well be a repeat of that, so when we get really mired in the depths of the crisis, when we see equity markets come crashing down, when we see the gold price peak, at that point, we wouldn’t be surprised to see the Baht weaken to something like 35 or 36, maybe even worse than that, against the US Dollar.

As Paul finished with on CNBC, “So, for investors who are looking to exploit currency opportunities, whilst the Baht is undoubtedly, over time, likely to keep getting stronger against the Dollar, there is this short-term tactical opportunity to look out for of something like a 20% gain in the US Dollar or a 20% fall in the Thai Baht. When that happens, that’s really the time to be loading up on Baht and Baht assets. At that stage, the Thai currency is looking like a very interesting proposition, and we also expect that at that stage, the SET is going to be at something like 650, and that’s a really good time to be loading up on the SET as well.”

Just make sure you are around with the currency cup is being passed around!

The above data and research was compiled from sources believed to be reliable. However, neither MBMG International Ltd nor its officers can accept any liability for any errors or omissions in the above article nor bear any responsibility for any losses achieved as a result of any actions taken or not taken as a consequence of reading the above article. For more information please contact Graham Macdonald on [email protected]