The Canadian Dollar Bull Market Benefits Gold Investors

by Dr. Richard S. Appel
August 31/05

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.

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.

Please visit my website www.financialinsights.org where you will be able to view previous issues of Financial Insights, as well as the companies that I am presently following. You will also be able to learn about me and about a special subscription offer.

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. © 2004 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.