Agcapita Update

October 2010
Agcapita Update

And they’re off….

The race to the bottom in the foreign exchange markets

appears to be beginning in earnest.  According to one
analyst over 25 countries have intervened to devalue their
currencies in the last 12 months - apparently a record of
sorts in recent times. 

A wag once said something to the effect that post gold

standard “currencies don’t float; they fall at different rates.” 
Worse yet is the inflationary damage caused by the pursuit
of the specious competitive advantage of a weak currency,
particularly when others are attempting to engage in the
same practice. 

Everyone cannot have the weakest currency but everyone

certainly can have high inflation as devaluations cause
a loss of purchasing power of the currency in relation to
assets whose quantities are not being inflated - e.g. hard
assets such as gold, farmland, oil and other commodities.  
With the growing belief amongst the governments of
the world in devaluation as part of the path to recovery
consider what the CRB Spot Index may be indicating. 
The CRB has experienced an approximately 60% recovery
to around 485, a new all time high, surpassing its previous
high of 481 set in July 2008.  

Why such a rapid rebound in commodity prices?  I believe

it represents a combination of real price increases due
to superior supply & demand fundamentals in agriculture
and energy and a healthy dose of nominal re-pricing to
offset ongoing currency debasement.  Is inflation really
quiescent?

Quam magnum vectigal sit parsimonia.  We have now

have arrived neatly back to one of my over-riding themes
- some would argue it tends to be more repetitive than
overriding but most people are kind enough to indulge me. 

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Agcapita Update (continued)
What western economies need is more capital. There
is no way to create capital other than through savings
hence the ancient expression “what a wonderful
revenue lies in thrift”.  Printing money does not create
capital, and worse, the inflation it creates ultimately
causes long lasting harm to the production structure
of the economy.  Think about the long-term damage
being done by our governments when they subsidize
failed enterprises - as Herbert Spencer reminds us
“The ultimate result of shielding men from the effects
of folly, is to fill the world with fools.”
I believe that sustained real growth is unlikely to take
place in the developed world until these nations stop
engaging in capital destroying activities. A depleted
and declining capital pool, combined with enormous
expansion of the monetary base and expanding
government is creating a high probability of an
extended period of stagflation in the west.
Asking for your indulgence one more time I would
like to talk a bit about gold.   There is much public
speculation on whether or not gold is in a bubble.  Stephen Johnston - Partner
If you believe that gold prices are rising because
gold is being remonetised then here is an interesting
valuation methodology - determine what gold price
is necessary for each unit of central bank paper to
be backed by that country’s gold reserves.   If, for
example, you perform this calculation for the US
using M1 as the monetary numerator you obtain the
following results: gold reserves - 8,133 tonnes, M1 -
US$ 1.8 trillion = gold price of US$6,888/oz.
Gold aside, I continue to believe that one of the best
ways to invest in commodities is to invest in cash-
flow positive production assets in politically stable
regions of the world - i.e. rather than invest in the
commodities themselves, invest directly in the assets
that produce the commodities.  Over the long term
you capture the value of the raising commodity prices
with less volatility as they are ultimately capitalized in
the value of the production assets.  In the interim you
are holding a cash-generating asset.
Kind Regards
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