Overnight the iron ore price tumbled 2.8% to a three-week low of US$77.10 a tonne according to Metal Bulletin.
This means prices have now fallen 8.9% from the multi-year high of $83.58 a tonne set less than two weeks ago.
The decline led the UK-listed shares of BHP Billiton Limited (ASX: BHP) and Rio Tinto Limited (ASX: RIO) to drop lower. Their Australian-listed shares and those of Fortescue Metals Group Limited (ASX: FMG) have followed lower today.
It wasn't only the iron ore miners which dropped lower. Weakness in iron prices sent the Australian dollar to a seven-month low against the U.S. dollar. At the time of writing the local currency is fetching 72.2 U.S. cents.
I expect this is only the beginning of further declines for both iron ore and the Australian dollar.
Iron ore prices are unnaturally high and it seems very unlikely that they will be able to remain anywhere near US$80 a tonne as supply increases next year.
So much so that when the bubble finally bursts I wouldn't be too surprised to see prices sink below US$60 a tonne. This would put significant pressure on the iron ore miners' share prices, which is why I think they are best avoided right now.
Instead I would suggest investors buy companies which will benefit from a weaker Australian dollar.
I feel falling iron ore prices, rising interest rates in the United States, and potential rate cuts from the Reserve Bank could all push the Australian dollar toward 65 U.S. cents next year.
Much to the delight of companies such as Treasury Wine Estates Ltd (ASX: TWE) and Catapult Group International Ltd (ASX: CAT), which generate a significant portion of their revenue from the U.S. market.
This could act as real boost to their earnings growth next year, which I believe makes them great investment options.
