What Berkshire Hathaway's Move Could Say About The Euro, The Dollar, And Gold

| About: SPDR Gold (GLD)

Summary

Berkshire Hathaway issued 1.1 billion in euro-denominated bonds at the start of the new year.

The choice of currency denomination could be a signal on continued US dollar strength and euro weakness.

If euro weakness is expected to continue, along with dollar strength, this will have an impact on asset values such as gold.

Summary

At the start of the new year, Berkshire Hathaway (NYSE:BRK.A) (NYSE:BRK.B) filed with the SEC announcing the sale of 1.1 billion euro denominated bonds in two tranches. The first tranch is €550 million in senior notes with maturity in 2021 bearing an interest rate of 0.25%, and the second tranch is another €550 million in senior notes due in 2023 bearing a 0.625% interest rate.

Potential Hints and Implications

Although this is a small amount relative to Berkshire's entire market cap of just over $400 billion, it is interesting pick up on due to the choice of currency the bonds are denominated in. Usually, when foreign firms issue bonds in US dollars instead of their home currency, the bond is referred to as a yankee bond. In this case, we have an American company issuing bonds in a foreign currency, giving it the title of a reverse yankee bond. A company might choose to issue a bond in another currency if it thinks the currency used will devalue over the life of the bond relative to the currency it earns in. In this case, we can suggest that one reason for the choice of issuing EUR bonds instead of US dollar bonds is that Berkshire believes the EUR will be worth less relative to the dollar when the bonds come due in 4-6 years, making this a currency bet.

Following this train of thought, with a weaker EUR, the US dollar would be relatively stronger which has its own impact on assets such as gold (NYSEARCA:GLD). Although this is a small bit of news, and is ultimately not hugely material to Berkshire's financial position, it could be a signal that the US dollar and EUR will continue their trend towards parity in the near term. Longer term, if you extrapolate the chart on the euro to US dollar exchange rate, we may see the US dollar come out on top, especially as economic instability and unclear outlook for the European Union's likelihood of staying intact continue as concerns going forward. This is not an unreasonable thought to entertain, as the 10 year chart shows the EUR's value relative to the dollar on a continued downtrend, from highs of 1.60 EUR/USD dating back to early 2008, to its current exchange rate of 1.05 EUR/USD.

Regarding gold, its price has multiple other factors affecting it than just the EUR/USD rate, as evidenced by its 10 year price chart that doesn't quite follow the nice continuous downtrend seen in the EUR's relative value. However, if the USD continues to appreciate going into the new year, on the back of a stronger dollar and weaker EUR, this is not a positive sign for a huge up move in gold prices.

All that being said, this bond issuance by Berkshire could also simply be them taking advantage of a negative interest rate environment in Europe, allowing them to issue low interest rate bearing bonds to load up on EURs in order to acquire a cheaply valued European firm. However, it is unlikely that this move would be made if Berkshire believed the EUR could re-appreciate in value significantly over the next few years, as that would leave them with bonds needing to be repaid with lower valued US dollars at that time.

Conclusion

To sum up, this is a small but interesting move by one of the greats in the field, and a factor worth taking into consideration when thinking of the future performance of the USD, EUR, and precious metal values such as gold.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.