As I see it, the big risk with these types of stocks at the momement is the currency risk.
The US Current Account Deficit (CAD) is huge (approximately 5% of GDP). The US needs to attract 80% of the worlds available capital just for the USD to maintain its current level. Some may say, yeah but the CAD is at much the same level as it was a few years ago and the USD didn't fall back then. This is very true. But back then, other factors such as the huge M&A activity from Euro telcos purchasing US telcos and a relaxation in foreign investment restrictions for European pensions helped the US attract the foregin capital it required to maintain the USD. These factors no longer exist. Furthermore, with interest rates in the US as low as they are, the US is going to find it difficult to attract foreign capital. I expect the USD could depreciate another 30% against a MSCI basket of currencies until the CAD reaches a more sustainable level of approximately 2.5% of GDP.
Locally, we also have a similarly large CAD in terms of % of GDP. However, the absolute size of our CAD is practically irrelevant when compared to the US. The relatively high interest rates in Australia should help attract foreign capital to Australia and help support the AUD. Furthermore, if commodity prices continue to appreciate, as I expect they will, this will also help support the AUD.
Small mining stocks such as AGM have had a great run on the back of surging commodity prices. However, one needs to remember the effect is somewhat diluted by the fact that the AUD has also surged against the greenback.
AGM Price at posting:
0.0¢ Sentiment: None Disclosure: Not Held
