The forex trade that netted Buffett $100M

FX Strategy Articles > Fundamental articles

You won’t find out by reading Berkshire Hathaway’s 2010 Annual Report that Bueffet made $100M from FX trading, however, if you happened to be lucky enough to attend the recent Warren Buffett talk fest in Omaha Nebraska or just happen to get your hands on a set of notes from that Annual Meeting you’ll have heard the answer Buffett gave to a question from an attendee worried about the falling US$ and whether Berkshire was doing anything with currency hedges. Buffett responded that they weren’t actively hedging and in general he doesn’t know what the movements between the AUD/USD. dollar are going to be but in the same breath he also mentioned that he made a cool $100 Million by buying Aust. dollars in 2010!

This leads me to ponder the question – Why did the world’s greatest investor load up on Aust. dollars?

The answer probably partly lies in Buffett’s business partner Charlie Munger’s comments in response to the same question. “Australia has open pit mines at a time when Asia is booming and needs lots of metal.”

So, is the U.S dollar facing continual decline to extinction? Not likely!

Is the Aussie dollar to settle at a new exchange rate over 40% above its 50 year average from here on? Well, maybe if you believe the Resource Super Boom is here to stay. However, I’d hazard to suggest again, not likely! Long term reversion to the mean is a tough force to bet against…. In the very long term at least.

Anyhow, back to pondering Buffett’s thought process. His investment strategy doesn’t involve a lot of commodities or currencies generally and usually he is looking for a long term compounding return rather than a short term trade. But bare in mind he once cornered the Silver market owning a third of it!

I think Buffett saw a window – he could see the risk trade was on, he could see commodity prices were rising and he knew the Aust. dollar would benefit from these forces. Also he understood the pressure the U.S dollar was under due to the Federal Reserve pumping the system with QE2 money. Skip forward 12 months and Buffett was not only happy to book his large gain but also commodity prices and exchange rates have hit new highs and while they could go higher its not the same risk/reward trade off that Buffett took a year ago. Likewise QE2 is coming to an end and while there could be a QE3 if there isn’t then there is high chance that interest rates move higher in the U.S and the U.S dollar rebounds.

David Galland summed up the current situation perfectly in a recent interview:

“You look at a chart of the dollar, you’ll see that it has been bumping along the bottom recently. Logically, if the Fed stops monetising the Treasury’s spending, we should see a rebound in the dollar. The big traders – the big institutional money out there – are going to use the change in Fed policy as a clear signal that it’s safe to get back in the U.S dollar.

It would be wrong to underestimate the amount of money that needs to find a home, and the liquidity advantages offered by the U.S Treasury market. If the river of money redirects into Treasuries, it could – at least for a time – offset the Fed’s exit and push the dollar up, maybe significantly so. And if the dollar comes roaring back, commodities, including gold and silver, would likely take a fairly hard hit.

Published on 20th of May 2011
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