Don’t trust the U.S. dollar?
Then buy gold call options.
That’s what some prairie farmers are doing to hedge their risk against the U.S. dollar falling, according to Calgary farm marketing adviser Errol Anderson.
“A fair number of our growers are doing it,” said Anderson.
“It can be a lot less expensive than hedging Canadian currency (with options).”
Most prairie farmers are vulnerable to changes in the U.S. dollar. For many years the Canadian dollar was weak compared to the U.S. dollar, so many farmers did not feel the need to hedge their exposure.
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But now that the Canadian dollar has risen against the yankee greenback, many farmers who sell products based on U.S. dollar prices are looking for insurance.
Currency options can be used to counteract unexpected changes in exchange rates, but many investors around the world are choosing instead to buy gold and gold options as a hedge.
That’s because gold prices and the U.S. dollar, while not directly linked, generally move in opposite directions. For many years gold prices suffered because conservative investors looking for the safest place to hold their money sold gold and bought U.S. dollars. That raised the U.S. dollar’s value much higher than it would have been based simply on the U.S. economy’s performance.
But with the recent slide in the greenback, many investors have started selling U.S. dollars and buying gold instead.
Recently the U.S. dollar fell to a record low against the Euro and a 12-year low against the Canadian dollar. At the same time, gold has risen to a 16-year high in U.S. dollar terms.
Anderson said holding positions in gold could protect growers from the dangers of a weak U.S. dollar.
“If the gold suddenly ignites and the U.S. dollar goes into full blown collapse, the Canadian dollar will be rallying sharply higher and a gold call will offset the (risk) to canola,” said Anderson.
“You can hedge a metal market to hedge the currency, which will protect the crop.”
Anderson has been buying February and April gold calls for farmers, but not beyond that because the premiums get too expensive. The longer an option has to its expiry, the greater its premium costs.
Anderson said some farmers consider option premiums well worth the cost in times like these because the risk is so great. He said if the U.S. dollar plummets, canola could fall to $250 per tonne this winter.
“We’d be schmucked,” said Anderson.
But there are risks to the gold strategy.
Many nations’ central banks own large amounts of gold, and some analysts think gold prices could be hammered down if those banks begin selling their stocks. Recently France announced plans to sell 600 tonnes of gold in the next five years.
Anderson said farmers are worried that the U.S. dollar will keep falling, eroding the value of the grain in their bins.
If the Canadian dollar goes to 90 cents US, “we’re toast,” he said.
