Here’s to a soft landing

The decline of the United States dollar on international currency markets is, like the dot-com meltdown, one of those things everyone will say he saw coming a long time ago.

It’s no great distinction to have predicted the greenback’s fall. No currency has an infinite value. (Neither has any stock, for anyone still keeping track of Amazon or Red Hat.) The longer the U.S. dollar went up, the closer it got to the day it would crash.

The Federal Reserve’s dollar indexes — the trade-weighted measure of the dollar’s value against the Americans’ major trading partners — tells the tale, running up from about 1995 and peaking in January 2002. The increase in the U.S. dollar’s exchange rate was fed not by export revenues but by capital inflows; in the late 1990s, everyone everywhere wanted a piece of the booming U.S. stock market.

It wasn’t a situation that could last, and it appears to be ending. There are some interesting implications for the mining industry, both good and bad.

First, there’s little doubt U.S.-priced commodities are in for a rally. That’s already obvious in the gold market, where bullion prices are climbing again now that the air has been let out of the Middle Eastern panic-premium. A subtler (but more telling) indication is in the prices of the white goods: platinum group metals, which had been in a slow slide, have bounced back strongly in the past week.

The base metals may take a little longer to react, as may agricultural and other commodities, but a weaker U.S. dollar will ultimately drive all their prices up.

Second, the proxy currencies — gold and real estate, especially — are likely to see renewed interest from investors looking to protect existing wealth. Of the two, though, only one has been unfashionable and underpriced for the past three years. Look for gold to regain its importance as a pure investment.

Third, there will be no falling back on a declining local currency as a prop for earnings. Major commodity-producing countries have spent the past seven years watching their money decline in value against the U.S. dollar; their costs declined in proportion. Now the Canadian and Australian dollars and the rand are shooting skyward, and at least some costs will go up with them.

In the new atmosphere, sitting back and watching the top line build up will not be enough to increase earnings. There will still be a place for cost control in the mining business, and depending on how far and how fast the U.S. dollar falls, that place may even grow. Efficient miners will not be giving up their comparative advantage.

Fourth, the advantage of a falling local currency will swing to U.S. commodity producers. It is sometimes forgotten — probably because commodities don’t figure heavily in U.S. exports — that the States is a large commodity producer in its own right. American-based mining companies (and the foreigners with large U.S. operations) may breathe a sigh of relief as they watch greenback-denominated commodity prices rise without a corresponding increase in production costs.

Whether that can translate into a new mining boom in the United States is a different matter. Good economics may not be enough to overpower an increasingly difficult regulatory regime, especially at the state level.

Fifth, U.S. companies may again become takeover targets. The boom in U.S. equity markets priced many American companies out of the worldwide market — though, significantly, many neglected “old-economy” companies were taken over by foreign interests while the dot-coms and telecoms vacuumed up domestic capital. U.S. equity markets have been falling for three years now, and if the fall of the dollar is added to the mix, there may be bargains to be had.

Sixth, there is probably little danger that the U.S. Federal Reserve Bank will be tightening monetary policy to support the dollar. The Fed’s bias since the deflation of the stock market bubble in 2000 has been in favour of looser money and a lower dollar. With other major “engine” economies like Japan and much of the European Union locked in slow growth, the central bankers all know that the world can’t readily afford a slowdown in the United States.

That, of course, has strong implications for both gold and base metals. If the Fed is willing to tolerate some inflation in order to get some economic growth, metal prices will be on the move.

Will the fall of the U.S. dollar make miners rich? Probably not. But when a high U.S. dollar contributed to the distortion of capital flows, it looked like it would make us all poor. On balance, a falling greenback looks good for the mining business here, and in the United States too.