For a while there, I thought Velcro was back. Glow colours were again de rigueur. The synthesiser had retaken its (hastily awarded) place as the pop instrument of choice. Then I realised it was just Goldman Sachs. The investment bank, known – fairly or unfairly – as the Vampire Squid, has been hastily spoiling the Australian party.
Goldman, the bank that Macquarie would like to be when it grows up, is tipping the iron ore price will hit US$80 a tonne (a long way down from a relatively-recent US$140 per tonne) in 2015… as little as nine months from now.
Then, as if to rub salt into the wounds, it is today suggesting that the Aussie could hit the same mark (in cents, rather than dollars, mind you) against a resurgent greenback by March of next year.
Talk about 'Another Brick In The Wall'! Or maybe it should be The Clash's 'Straight To Hell'? No sooner had we got used to record iron ore prices and the little Aussie battler being close-to-parity with the US dollar, than Goldman decides it wants to spoil the party.
Goldman isn't known for missing the big picture, or for being wrong too often… so what's an investor to do?
Under Pressure
As regular readers would know, I'm no fan of investing in commodity companies, especially at high prices – such as the recent iron ore highs or gold when it was hitting record prices close to US$1,800 per ounce. Share prices might have fallen accordingly, but by then, it's too little, too late.
There's a time and a place – and more importantly a price – for them, but that's not now. If the price does get close to $80, I might be interested! Maybe Chinese demand accelerates, maybe it doesn't. The world's miners might continue adding capacity, pushing the price down, or maybe they don't. Just remember that unless you really know the forces behind that demand and supply – and you can accurately forecast the impact on prices – any investment in iron ore is going to be risky. Some might even call it a gamble.
And with the world's miners digging up as much iron ore as they can find, I wouldn't want to be betting against Goldman.
Road to Nowhere?
As for the Australian dollar, we shouldn't be surprised with Goldman's call. The forces behind our currencies rise include years of very strong Chinese growth, relative high interest rates (compared not to history, but to the rest of the world) and – at least for a time – an economy that was the envy of the developed world while others were in deep recession.
In other words, we had unusually strong economic characteristics while the rest of the world was unusually weak. When the tide has come all the way in, there's only one way for it to go next, and that helps explain the fall from close to US$1.10 back to just over 90 US cents.
The long run average (post-float) for the Australian dollar is closer to 85 US cents. That's not a floor, remember, but an average. Simplistically, that tells us the dollar has spent as much time below that mark as above it. (The maths are more complex than that – though not a lot. The average is a function of the amount of time and the actual level, so a long time at 84 cents is equal to a relatively shorter time at 60 cents, for example.)
If the Aussie is to remain above 85 cents for an extended period, we have to assume that either it will eventually fall below that, returning to its long term average, or that there is a fundamental and semi-permanent shift of the Australian economy, relative to the rest of the world.
Trying to fight three decades of history – which included booms, busts, wars and prosperity – with an assumption that 'it's different this time' is a tall order.
Livin' On a Prayer
Behind Goldman Sachs' calls on both iron ore and the Australian dollar lie two simple economic and investing truisms. The first is that excess profits bring in new competition that pushes prices – and profits – down.
The second is Sir John Templeton's observation that the four most dangerous words in investing are 'this time it's different'.
Foolish takeaway
Goldman's timing might be all wrong. The prices might be too conservative or too aggressive. But the direction it's predicting for both iron ore and the Australian dollar is down – and in both cases, Goldman has history on its side. As Billy Joel said; everybody's talkin' 'bout the new sound… funny, but it's still rock and roll to me.
