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August 28, 2005 – In April,
2003, I wrote an essay entitled, “A Canadian Dollar Bull Market Will Greatly
Benefit Holders of Canadian Gold Mining Equities”. In it I discussed my
belief that a Canadian Dollar Bull Market existed, and that it was destined
to greatly benefit U.S. investors who purchased Canadian resource stocks.
This was in addition to the substantial gains that I foresaw in the stocks
themselves.
At the time, the Canadian
Dollar was worth about 0.69 U.S. During the ensuing two and a half years the
Canadian Dollar has appreciated and is now trading at $0.835 U.S. To those
who either invested in the Canadian currency or in Canadian mining or other shares
at that time, this generated a windfall 21% currency profit to all of their
holdings. I now believe that we are on the verge of a renewed surge in the
Canadian dollar and new Bull Market highs. If I am correct, this will reward
U.S. holders of all Canadian dollar denominated investments! It is for this
reason that I am updating my earlier article to bring this important
situation to your attention.
Very few gold stock investors
realize that many of their transactions originate in a foreign currency. Yet,
their investment profit or losses may be greatly influenced by the change in
parity between their native currency, in this case the U.S. Dollar, and the
currency of a foreign nation whose shares they acquire.
Whenever a stock is bought on
a foreign stock exchange, investors must pay for its shares in that nation’s
domestic monetary unit. This is due to the fact that the country where the
transaction is consummated, is the determining factor in the money used in
settlement. If you travel to Paris you pay for your purchases in French
francs. Similarly, if you buy stock on a French bourse, settlement is made in
the local French currency. This is similar throughout the world. It doesn’t
matter if the stock transaction is executed on a Chinese, Swiss, German,
American, or Canadian stock exchange.
If you are an American, the
currency transaction component for your foreign exchange purchases or sales
are automatically executed by your brokerage house. This often occurs with no
knowledge to the client.
Americans are accustomed to
dealing solely in dollars. This is quite different from Europeans or other
foreign groups who are familiar with cross currency transactions. Due to this
general lack of understanding by the typical American, brokers normally only
discuss or quote the price of a foreign security in U.S. dollars. They do
this because it is easier for Americans to understand. Similarly, in the
U.S., the price that is listed on a brokerage confirmation for a foreign
stock purchase is also denoted in U.S. dollars.
Even most knowledgeable
Americans who regularly deal in foreign currencies often prefer this
arrangement, because it is difficult for most of us to think in duel
currencies. Further, since most American brokers cannot adequately explain
the currency transaction portion of the trade to their clients, they tend to
avoid so doing. Thus, while many individuals who invest in Canadian resource
companies believe that they are all traded in U.S. dollars, most are actually
bought and sold in the money of our northern friend.
A bit of history from my own
experience might help at this juncture, to give you a better grasp of this
concept. During the gold rally that began in early 1993, I invested in
numerous gold exploration companies that traded solely on the Canadian stock
exchanges. The Canadian Dollar was worth approximately $0.80 U.S. at the
inception of gold’s price rise from its $323 nadir. When gold peaked at $420
in1996, the Canadian Dollar had declined to about $0.73 U.S. Investors like
myself who had invested early in gold’s advance, while we may have benefitted
from the price increases in the Canadian junior companies, experienced their
profits reduced when they sold their stock. This resulted when the received
Canadian currency was converted back into U.S. dollars. In this instance, it
represented a currency loss due to the Canadian Dollar’s decline in price
over this time-frame. The northern dollar was destined to decline further,
until it’s Bear Market ended at about $0.62 U.S. in early 2002.
In my youth during the 1960's,
I remember that the Canadian Dollar was worth above parity with its U.S.
counterpart. I did not regularly follow the fluctuations of the two
currencies. However, I recall the Canadian Dollar trading at a premium and
above $1.10 U.S. to the U.S. dollar. This was a period when their government
exercised sound monetary policy and prior to the assumption of power by its
long-standing socialist leaning regime.
Through the years the Canadian
currency fluctuated greatly against our own dollar. During the past two
decades it traded between a high of about $0.89 U.S. and its recent low at
$0.62 U.S. This has acted to either the benefit or the misfortune of
Americans executing Canadian stock transactions, and was dependent upon the
time-frame between when they entered and left the Canadian markets. If one
bought Canadian securities when their monetary unit was worth little when
compared to the U.S. Dollar, and sold when the Canadian Dollar had risen in
value, they would reap a substantial reward. Conversely, if they acquired
Canadian investments when their dollar was high when compared to ours, and
sold those assets when the Canadian money had declined, they would suffer.
I believe that a few examples
will be helpful to better understand the mechanics of these transactions. For
simplicity I will assume that there are no involved commissions or
transaction costs.
If an American investor
purchases $10,000 Cd. worth of a Canadian stock when its dollar was worth
$0.90 U.S. it would cost him $9,000 U.S. ($10,000 Cd. x $0.90 U.S.). To make
this easy let’s suppose that he later sold the stock at the same price, but
the Canadian Dollar had fallen to $0.80 U.S. After the sale he would only
receive $8,000 U.S. ($10,000 Cd. x $0.80 U.S.) and would suffer a $1000 U.S.
loss ($9,000 U.S. cost minus $8,000 U.S. sale) in the completed transaction.
This would result despite the fact that there was no change in the value of
the acquired securities.
However, if the same $10,000
Cd. transaction occurs with the Canadian Dollar originally worth $0.80 U.S.,
it would give him an investment cost of $8,000 U.S. ($10,000 Cd. x $0.80
U.S.). If our northern partner’s dollar later appreciated to $0.90 U.S., for
a value of $9,000 U.S. ($10,000 Cd. x $0.90 U.S.), the investor would instead
be rewarded with a $1,000 U.S. currency profit ($8,000 U.S. cost, plus $1,000
U.S. currency gain). Again, this would occur despite the fact that the
underlying stock had remained unchanged in value.
It gets quite interesting if
one makes a substantial profit in his Canadian stockholdings! This is because
the currency component profit or loss affects the entire value of the stock
at the time of its sale.
Let’s again assume that an
investor begins with a $10,000 Cd. investment in mining stocks. Further, it
increases to $50,000 Cd. and the Canadian Dollar appreciates in value from
$0.80 U.S. to $1.00 U.S. In this case his original $8,000 U.S. ($10,000 x
$0.80 U.S.) investment rises not to $40,000 U.S. ($50,000 Cd. x $0.80 U.S.)
but to $50,000 U.S. ($50,000 Cd. x $1.00 U.S.) This represents an additional
$10,000 U.S. profit due solely to the Canadian Dollar’s increase against our
dollar. Thus, the currency profit alone was greater than the original
investment.
I recognize that the above may
be confusing, but it gets easier from here. In fact, if all that you learn
from this missive is the concept that a stronger Canadian Dollar can
dramatically enhance your Canadian stock portfolio profits, I will achieve
what I have set out to do.
As you can see, the change in
parity between the Canadian and U.S. currencies can be of considerable
importance to the American investor in Canadian gold mining equities. In the
earlier 1993-1996 instance the decline in the Canadian Dollar from $0.80 U.S.
to $0.73 U.S. represented a loss to investors. This was due to the then Bear
Market that existed in the Canadian Dollar and the corresponding Bull Market
in the U.S. dollar. However, I believe that history will prove that this time
it is indeed different, and in spades! I am confident that the current
secular Canadian Dollar Bull Market is destined to generate substantial
currency component profits when we ultimately sell our mining shares.
To date, the Canadian Dollar
has been a stellar performer during the initial stages of its U.S.
counterpart’s Bear Market. It posted a Bull Market peak at $0.85 U.S. in
November 2004. After that lofty point was touched it entered a secondary
correction which I believe ended at $0.785 in May of this year. If I am
correct, it has resumed its bullish advance and is fated to surpass its
earlier $0.85 U.S. high. Further, given the strength that I believe will
continue to drive the Canadian Dollar higher against our currency, I feel
that it is likely that a new all-time high will eventually result. Further, I
feel that the Canadian dollar’s Bull Market may continue to the end of this
decade.
I anticipated strong resistance at $0.88 U.S. when I wrote my original piece.
However, $0.85 U.S. acted as the first major area from which a secondary
reaction occurred. When $0.85 is surpassed the $0.88 to $0.89 zone may
temporarily retard its further advance. However, I believe that there is a
great likelihood that the $1.00 U.S. level will be tested by the end of 2006.
Investors in Canadian resource
stocks have suffered severely during the markets past one and a half year
secondary correction. If I am correct, not only will American investors
benefit from the Canadian mining Bull Market when it resumes, but they will
simultaneously further greatly gain from the appreciation that I foresee for
the primary currency in which they trade. This will truly be a windfall
profit for these investors. Not only can it add 20% or more to one’s entire
portfolio value when the Canadian Dollar trades at par with the U.S. dollar,
but I believe that the Bull Market in Canadian mining stocks is destined to
bestow potentially unbelievable gains to its loyal investors.
I recognize that we have been forced to endure a test of fire! However, given
the enormously depressed and oversold condition of the mining industry
sector, and the fact that the summer doldrums are coming to an end, I am
confident that we do not have long to wait for their Bull Market to resume.
THE
OIL MARKET;
A CORRECTION LOOMS CLOSER
The oil price again posted a
new all-time high. It ended last week at $66.13 after touching $68.00. I
began my June, 2004 issue of Financial Insights with an essay entitled “Why
Black Gold May Explode in Price”. Crude oil had just struck a new Bull Market
high and was trading just under $42. In that article I stated; “I believe
that the stage is set for an explosive rise in the price of oil. All that is
needed to light the fuse is for crude oil to hold above its old high for a
short period. If this occurs, and if history is a guide, it will quickly find
itself in the $55 to $70 price range.”
We are already at the top of the range that I thought could occur based upon
historical precedent. We are now hearing predictions of $100 oil and other
fantastic statements. To me this indicates that this leg of oil’s Bull Market
may be approaching a temporary high. This does not mean, however, that a
price decline is imminent.
I would not be surprised if oil eventually does surpass $100, but that will
likely occur a few years in the future. The possibility of it reaching $100
during this Bull Market advance is remote barring one or more unforeseen
supply interruptions which could create a price spike. However, if oil is
destined to surpass $100, this will likely occur after an important
correction has ended.
Crude oil’s Bull Market up-wave is among its longest on record. For that
reason with each passing day the correction that I foresee is moving nearer.
I believe that is likely that oil will strike an interim peak within the next
several months. It will likely occur by early 2006. From there it will
produce what I believe will be a frightening secondary correction. After that
price reversal ends, it will create a condition that will be capable of
supporting record new highs as crude’s secular Bull Market resumes its upward
race.
`I am sharing these thoughts with you in order to bring some readers down to
earth! All major Bull Markets have important corrections that act to frighten
all but the strongest holders out of the market. When the weak hands are finally
purged the correction ends. This allows the item in question to gather
strength with which it can continue its Bull Market, and mark even higher
prices than were previously posted. Crude oil is going higher in the short
term, but the stage is being set for a major correction after its
intermediate peak is reached. Be prepared.
The above was excerpted from
the September 2005 issue of Financial Insights © August 28, 2005.
*******
I publish Financial Insights.
It is a monthly newsletter in which I discuss gold, the financial markets, as
well as various junior resource stocks that I believe offer great price
appreciation potential.
CAVEAT
I expect to have positions in
many of the stocks that I discuss in these letters, and I will always
disclose them to you. In essence, I will be putting my money where my mouth
is! However, if this troubles you please avoid those that I own! I will
attempt wherever possible, to offer stocks that I believe will allow my subscribers
to participate without unduly affecting the stock price. It is my desire for
my subscribers to purchase their stock as cheaply as possible. I would also
suggest to beginning purchasers of these stocks, the following: always place
limit orders when making purchases. If you don't, you run the risk of paying
too much because you may inadvertently and unnecessarily raise the price. It
may take a little patience, but in the long run you will save yourself a
significant sum of money. In order to have a chance for success in this
market, you must spread your risk among several companies. To that end, you
should divide your available risk money into equal increments. These are all
speculations! Never invest any money in these stocks that you could not afford
to lose all of
Please call the companies regularly. They are controlling your investments.
FINANCIAL INSIGHTS is written and published by Dr. Richard Appel and is made
available for informational purposes only. Dr. Appel pledges to disclose if
he directly or indirectly has a position in any of the securities mentioned.
He will make every effort to obtain information from sources believed to be
reliable, but its accuracy and completeness cannot be guaranteed. Dr. Appel
encourages your letters and emails, but cannot respond personally. Be assured
that all letters will be read and considered for response in future letters.
It is in your best interest to contact any company in which you consider
investing, regarding their financial statements and corporate information.
Further, you should thoroughly research and consult with a professional
investment advisor before making any equity investments. Use of any
information contained herein is at the risk of the reader without
responsibility on our part. Past performance does not guarantee future
results. Dr. Appel does not purport to offer personalized investment advice
and is not a registered investment advisor. The information herein may
contain forward-looking information within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of
1934. In accordance with the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995, the statements contained herein that look
forward in time, which include everything other than historical information,
involve risks and uncertainties that may affect the company's actual results
of operations. © 2005 by Dr. Richard S. Appel. All rights are reserved. Parts
of the above may be reproduced in context, for inclusion in other
publications if the publisher's name and address are also included for
credit.
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