Hedging.. Not the Garden variety

We thought we would try something a bit different. We are getting approximately a thousand page impression per day at present, so we think we may have reached a large enough audience to start asking a question or two.

We will leave this post at the top of template for a while to see how many answers we can collect over the coming weeks, and if this experiment works we will try again later with another question.

Our first question is about hedging. We note once again that gold and its little brother silver have hit a record which would suggest many people are not convinced the recession is really over.

Gold has hit a record high for the fourth day in a row, boosted by growing expectations for US interest rates to remain exceptionally low as the economy struggles, while silver came in range of 30-year peaks.

Obviously gold is seen as a safe haven, but is also being traded by those who think others will see it as a safe haven.

In Australia the economy is rolling along, but is leveraged to China and housing speculation which requires ever increasing private debt. Today we note that many are claiming that the Australian dollar is very overvalued.

Australia’s dollar, this quarter’s best performing major currency, is now the most overvalued.

Purchasing power parity, a measure of the cost of goods relative to other countries, shows the so-called Aussie is 27 per cent too expensive, according to data compiled by Bloomberg. The median estimate of strategists and economists is for it to weaken 6 per cent by year-end, the fourth-worst performance of 31 currencies tracked by Bloomberg.

If you believe this then gold could be a double whammy. You could get the “fear trade” and the “forex” effect all at the same time.

Maybe you believe physical gold is at the end of the line, but still think it will hold its value, so a purchase of shares in Newcrest or an up and coming gold small cap that is not exposed to iron might be your idea. We note that Ausgold found lots of the shiny stuff just yesterday according to BusinessSpectator

Ausgold Ltd has identified a 241,800 ounce JORC-compliant gold resource after studying over 100 km of previously unmapped Archaean greenstones at the Boddington South gold project in Western Australia.

However maybe you think it is all rubbish and are just waiting for a good price for RIO/BHP because China has a long way to go and India is just getting started.

If you are worried about the Australian housing bubble then maybe you are shorting the Oz banks or something more permanent such as selling your house and stowing the cash. On the otherhand maybe you think commodities are all doomed, and like the look of Government bonds. Again if you believe the overvalued AUD story then US bonds would give you a US government backed investment with a forex effect.

Or maybe you just think everything is an illusion, you are waiting for reality to catch up and are busily installing a bunker and loading up on ammo.

Lets us know. Are you hedging? and if you are how. Even if you are not, let us know how you think you should.

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  1. I did a bit of investigating about buying gold at the start of the Financial Year, even visited a dealer, but did not buy any. Sooooooo regretting it now.

    I think gold shares are a good deal. I like the sound of the small-caps especially in a rising market. Looks like I should have got some Ausgold about 4 months ago as well. Seems I am good at missing the boat. :((

    Love your blog.

  2. Sold a house earlier this year. Would have done it late last year if I could have. In retrospect it seemed like pretty good timing – the QLD market has been heading backwards since.

    I'm not a fan of gold – a market where you speculate on the speculations of others.

    I am ready to short the AUD against the pretty much anything.

  3. I went looking for a new house earlier this year as my trendy inner city digs were not suitable for my impending newborn. Several months were spent looking at houses that I just wasn't prepared to pay the asking price for (I could have – my income is well and truly in the high earners category). Eventually we had to rent a place as the clock was ticking. The place we are renting is nicer than anything we looked at to buy, in a better area than where we were looking, and less than half the cost of the mortgage I would have been paying if we had bought.
    This left me in the position of deciding what to do with my existing property. I went to my accountant to discuss a few ways of holding the property (in my name, my wife's name, refinancing etc). The best he came up with was being able to hold the property for no cost to me which he assured me was a winning proposition as the house would only go up in value. The idea of that didn't appeal as I am able to conceive of another direction in which house prices can go, so I decided to sell the house (it is up for auction this weekend – would any greater fools like to know the address?).
    Hopefully there's still enough life in the market to get it sold and I will come out well ahead of the price I bought it for 5 years ago leaving me with several hundred $K to sit on, so essentially I am shorting the house market by adopting a cash position (although if I had found a house to buy 6 or 7 months ago I possibly would have foolishly strolled into a painfully large mortgage).
    The only thing I am unsure about is where the best place to stash my not-so-hardearned is. Term deposits are actually pretty competitive at the moment but I'm not 100% confident in the safety of Australian banks at the moment. Hopefully Australia Inc will still be happy to bail out any ugly positions the banks find themselves in. Any suggestions from others what I should do to improve my shorted position?

  4. I rent, currently saving. Have a reasonable deposit for a house, but not enough with these current prices. House prices would have to come down considerably before I would consider entering the market.

    As for Gold, it is possible that it may go a lot higher but it very much depends on the U.S economy. I can't see the U.S improving any time soon.

    I do think however, that Australia has got itself in a bit of dilemma, with the Mining economy doing well and the rest of the economy not so good. It will be interesting to see how this plays out over the next 12 months.


    ps: Good work on your blog, visit it regularly.

  5. Current position is put options on AUDUSD for 4-6 months out. Cheap punt but either a win/loose play due to option expiry.

    QUESTION: Any other non-expiry play available for short AUDUSD?? ETF or the like?
    Otherwise will re-load the 10-20% dip on AUDUSD via options

    Have thought about going long Gold in AUD – but have kept waiting for the non-existent pullback in Gold…gggrrrrrr.

    Play some of the 3X & Inverse ETFs on markets on occasions of pessimism/optimism but is a macro call on my understanding of markets, economic situation, animal spirits.
    Feels very much like a casino call – red or black at times tho!!

    Most $$$ is in bank on 6.5%, in alternative currencies, and a little bit for playing markets.

    Don't see much worth buying at present that is worth the risk/return ….

    thanks, enjoying the blog

  6. I've completely in cash – mostly AUD but still holding some GBP since returning from the UK in late 2007 unfortunately. Looked into gold/silver but haven't purchased, holding out for the correction everyone's been talking about :). Am concerned about bank-credit but I guess there's that govt guarantee until about this time next year…

    Been thinking about shorting the banks here but my research has come up short ;). There seem to be 2 online brokers offering short selling: CommSec and Macquarie Prime but neither offer shorts on the major bank stocks (Prime isn't offering shorts on anything at the mo).

    Still renting, waiting for the slow train wreck of a housing bust to have a significant effect on house prices.

  7. We bought a house in 1996 – $100K. We rented it out & headed OS.

    We've held it & upgraded over time & the house now pulls $38K pa in rent.

    The hedge is that we now have a nice house in a good area. If we try to sell now, we'll pay high transaction fees & CGT – maybe 25% of the settlement price.

    Come the crash, we will only lose minimal tax & transaction costs & still be pretty right to buy a nice house in a good area debt free.

    Can't wait for prices to fall, as we want to live in a house we own, but for now it is better to rent a living space from someone else and wait for the crash.

  8. We sold our first home in Aug 2009 (purchased in 2003) to move into a much bigger, newer, nicer place now we have 2 kids. The rent is approximately the same or less than the mortgage I was paying. We now have $300k sitting in the bank, could never have saved that over 6 years. My wife almost talked me into buying again a year ago – thank god I managed to hold out on her, now it looks like that was a good choice. Now waiting and watching. I feel a bit sorry for the people we sold to.