The Aussie dollar: A barometer for commodity markets

Thursday, 11 January 2024 — Melbourne, Australia

Twitter (X): @JCooperGeo

[3 min read]

Dear Reader,

Step back to 2001, and the Australian dollar traded for just 47 cents against the US dollar!

That was a terrible time to be travelling in the States.

But that would mark a MAJOR bottom, which would precede a gigantic surge in the AUD.

Thanks to China’s infrastructure boom, the Aussie catapulted its way to an all-time high of 98 cents in July 2008.

An incredible trough-to-peak move of more than 100% in just seven years…

That was a major move for a currency.

And it was largely thanks to Australia’s surging terms of trade, driven by rising commodity prices.

But the 2008 Global Financial Crisis briefly ended the ecstatic rise…

In a flight to safety, investors fled the AUD and moved assets into treasuries and US cash.

But what the chart above doesn’t show is the rapid recovery that followed the 2008 panic.

With the China-led boom rolling on, the Australian dollar did the unthinkable a few years later…

It surpassed the value of the world’s most important currency and reached an all-time high of $1.11.

But since those glorious highs, it’s been mostly downhill for the AUD.

With its strong leverage to commodities, the Aussie dollar has steadily declined into a decade-long downtrend.

That culminated during the pandemic-led panic of March 2020…

Where another ‘flight to safety’ event drove investors AWAY from the Aussie dollar.

From its glorious peak in 2011, the Australian dollar fell to a decade low of just 55 cents in 2020.

Is history repeating?

In many ways, the bottom of 2020 resembles the lows of 2001.

Australia’s most important export market (mining) had lain dormant for years.

A sector shunned by investors focused heavily on tech stocks.

But the need to invest in tangible assets began to RISE after 2020, just as it did in 2001.

Both periods were preceded by a MAJOR global shock…

In 2001, it was the threat of terrorism.

In 2020, it was the fear of a rapidly spreading virus.

Different CAUSES but similar outcomes…approximately 20 years apart.

If we use the last cycle as a guide, we could have some clues as to what comes next for mining…

2001 was followed by a strengthening AUD, alongside rising activity in the mining industry.

Similarly, in 2020 we’ve seen emerging strength across commodity markets.

That includes gold which now sits just below its all-time highs.

But does recent strength align with a rising AUD, as it did in the early stages of the 2000s commodity boom?

You’d be forgiven for thinking that the AUD has had a terrible run over the last couple of years.

Much of the narrative in financial circles has focused on major strength in the USD.

So, you might be surprised to see the AUD has actually trended up against the greenback over the past two years!

Take a look for yourself below…

A sequence of ‘higher lows’ against a backdrop of several market panics…

There was the 2022 inflation panic causing markets to bottom mid-way through 2022.

We also witnessed a major sell-off in October 2023 as the US Fed pushed its ‘higher-for-longer’ narrative onto global markets.

Both events sparked downward pressure on the AUD.

However, neither event pushed the AUD anywhere close to the pandemic lows of 2020.

So, why’s that important?

For the first time in more than a decade, the AUD is displaying ‘technical’ strength against the greenback.

That’s despite record breaking rate rises in the US.

What this could mean for an emerging bull market in commodities

Commodities are a multi-faceted beast, incorporating energy, food, and minerals.

That makes them incredibly difficult to track as a package.

Each commodity is influenced by its own supply and demand factors.

But when we talk about a ‘super cycle’, we typically mean a broad rise across the full spectrum of metals, energy, and food commodities.

And that can be very difficult to recognise in real time.

While some commodities surge, others could be falling.

Broadly though, we’d expect the full package of commodities to be trending higher.

With Australia’s economy remaining highly leveraged this sector, its currency offers a yard stick as to the broad direction of resources.

And, in my mind, the AUD chart below is showing early signs of strength…

And there’s plenty of anecdotal evidence that backs this up…

Take Australia’s mining hub, Perth.

Property price growth here is now the fastest in the country.

In fact, Perth property has followed a similar path to the AUD over the last decade, falling in the wake of declining commodity prices.

Yet, that trend has shifted over the last two years.

Similarly, vacancy rates in Western Australia’s capital are at record-low levels.

Australia’s mining capital is buzzing.

According to Geoscience Australia, 2021 saw record levels of drilling, surpassing the peak from the last mining boom.

No doubt, conditions are heating up in Australia’s mining industry.

So, how far could this go?

Given the AUD traded as high as $1.11 during the last mining boom suggests there’s plenty of room for growth.

That AUD currently hovers BELOW 70 cents.

A rising Aussie dollar could be a major theme in the years to come…keep it on your radar!

This is another important tool in the resource investor’s kit.

Until next time,

James Cooper,
Editor, Fat Tail Daily

James Cooper has been a working geologist in mines across Australia, Canada, and Africa since the early 2000s. He’s led the operations of tiny explorers through to huge producer outfits. He’s seen booms and busts firsthand and he also understands the cyclical nature of individual commodities. For example, James was right there when Barrick Gold launched an enormous $7.5 billion takeover bid for Equinox. That was the peak of the last cycle.

With his background as a geo and finance professional, he brings a unique insight and experience to Fat Tail Investment Research. He writes the broader resource-focused investing letter Diggers and Drillers and the ultra-speculative explorer-focused trading service Mining: Phase One.

[4 min read]

Dear Reader,

Nothing comes from nothing…no one comes from nobody…

…and there’s always more to the story; usually the important part of it.

We were doing a little wondering about where we came from…or at least about the industry of which we’ve been a part for the last nearly 50 years. Its genesis — for our narrow little piece of it — began in the late 1930s.

Patrick Maitland was the 17th Earl of Lauderdale, by virtue of which he was also the clan chief of Clan Maitland. He went to Oxford in the early ‘30s…and then became a journalist, for an obscure diplomatic newsletter called The Fleet Street Letter. Thus, did he join the hallowed company of hacks, has-beens, and occasional maverick geniuses in the newsletter trade.

We acquired the Fleet Street Letter in 1993. Lord Rees-Mogg, our long-time business partner, became its chairman.

Back in the ‘30s…

The heart of the matter

Maitland saw the job of a newsletter then, as we do now, to get to the heart of the story…to reject the official propaganda and tell the truth in a way a mainstream rag cannot. And he did it by putting his own boots on the ground where there was most likely to be trouble.

In the mid-‘30s, Germany, Italy, and Japan were ‘gunning up’. Their leaders wore uniforms, held mass rallies, excited the masses, and styled themselves as masters of war. But when Neville Chamberlain came back from Munich and reported that there would be ‘peace in our time’, Mailtand had his doubts. He decided to find out for himself. He went to Italy. He watched. He listened. And when he returned to London, he reported that ‘peace’ was an illusion; Mussolini wanted war. Britain needed to get ready for it.

He was, of course, right. The mainstream press relies on advertising. And advertisers want the imprimatur of a mainstream publication. After all, if you see it advertised in The New York Times, it must be legit! Mainstream publications aim to keep both advertisers and readers happy by sticking with storylines that don’t challenge them or irritate them.

Readers get what they want…what they expect…and what the paper wants them to have. Today’s New York Times, for example, passes along the elite, government line as news. ‘The Biden Administration did this…’, ‘Secretary of State Blinken said that…’ etc.

Over on the editorial pages, columnists and cheerleaders explain why the elite view is correct and why opponents are silly, evil, or stupid. Readers, with no alternative source of facts or opinions, fall in behind their thought leaders.

Newsletters, on the other hand, are written for the few, not the many. They do not attempt to please advertisers; they have none. Instead, they present contrarian, alternative views…often views that make readers uncomfortable. They dig a little deeper…turn over rocks to see the slimy things beneath…and try to help readers understand what is really going on.

The power and the glory

Maitland scored another big coup…a ‘scoop’ as they say in journalism…after the Second World War. The US had demonstrated its devastating atomic bomb, kept under close guard. No other nation had it. But in 1950, Maitland was among the first to report that the Soviet Union had a working model. This was a big story. How did Maitland find out? We don’t know, but here’s a hint: he hired a very special journalist — this one from Cambridge — Kim Philby.

Here is where the story gets interesting. Philby was a Soviet spy, one of the ‘Cambridge Five’, who infiltrated British intelligence and worked as moles for the Soviet secret police. He also wrote for the Fleet Street Letter.

Philby later worked at the British embassy in Washington. There, he got to know a young, gifted CIA agent named James Jesus Angleton. The two seemed to get along. What secrets they shared, we have no idea.

But Angleton was a hard-driving, divisive character. After a while, he had divided the CIA into two factions…the pro-Angletons and the anti-Angletons. Angleton himself got to be a little weird and perhaps unreliable. He had been placed in charge of the CIA’s counterintelligence unit…where they sought to root out double agents. Soon, he was seeing them everywhere. He claimed that the Prime Minister of England, Harold Wilson, was a Soviet spy. Same thing for the Prime Minister of Canada, Lester Pearson.

Rumour had it that in his zeal to identify potential enemies, he had ‘gone rogue’. It was said that he worked with the mafia and with Cuban exiles.

At this time, the CIA was remarkably incompetent. It hatched more than 600 different plots to kill Fidel Castro. All of them were failures. Its Bay of Pigs operation was a disaster.

John Kennedy, president at the time, was not even informed of the Bay of Pigs invasion until it was already underway. He was furious and vowed publicly to ‘smash (the CIA) into a thousand pieces’. A few months later, he was assassinated. RFK, Jr believes the CIA was involved in his uncle’s murder. Fingers pointed at Angleton.

Our Man in Maryland

By 1975, Sr Frank Church had come to believe that it was time to bring the CIA under control. His ‘Church Committee’ held hearings and discovered that many of the rumours were true. One of the most important witnesses was, of course, the then director of the CIA, William Colby. Colby was granted a special privilege. As director of an on-going covert operation, his testimony was limited. But what he reported…and what he heard…was enough to make him want to clean house. He fired Angleton.

By this time, Kim Philby had defected to Moscow. And now Angleton was taking his retirement too, at least, so they announced. Privately, he was let back into the CIA in an off-the-record deal and presumably went back to doing whatever it was he was doing before.

A few years later, Bill Colby retired too. But he didn’t entirely stop working either. Instead, he joined us as a consultant. We were just trying to ‘connect the dots’, as always. And we thought Colby may have some connections we lacked. But either he was too prudent to tell us very much…or he didn’t know very much.

When we met Colby, it was usually at his house in Georgetown. But he also had a place in Maryland, down on the Chesapeake Bay. It was there, one day, that he fixed himself his usual breakfast. And then, for some inexplicable reason, he appears to have gone out in his canoe — leaving the breakfast untouched. A storm was blowing up. But that didn’t stop him.

His body was found two days later…washed up on the beach.

Regards,

Bill Bonner,
For Fat Tail Daily