Monday, August 15, 2011

It's all about the Benjamins...

...Or Aussies, Swissies, Euros, Yen, Loonies, etc.  Yeah, yeah, the stock market plummeted last week.  It's irrelevant.  All eyes are on the currency market.  If your's aren't, they should be, because what happens with the currencies affects every other asset class, be it commodities, bonds or stocks in every country around the world.  Of course, the two currencies most looked at by traders are the Euro and the Dollar.  The Dollar has by some grace of God, managed to stay range bound between 73.50 and 76 for the last few months on the USDX.  The Euro has also done very little, and being that it is nearly 50% of the dollar index, explains why the USDX has managed to NOT crash yet.  But if that's all you are going on, you are missing WAY too much.

The other currency that is weighted the 2nd most on the USDX is the Yen, which despite Japanese government intervention to keep it from appreciating too much after such a devastating disaster like they've had, has mostly fallen on deaf ears as far as the currency market is concerned.  The USD/YEN is now trading at 76.75 currently and that is the dollar's lowest level against the yen since as far back as any of the charts I have will go. (Which is 1976 for the record.)  Despite a less than desirable economic situation in Japan that has been on going for a very long time, traders have still taken this to be a "safe haven" currency when compared with a currency that is now obviously beginning a downward spiral into hyperinflation.  From a trading standpoint, buying the yen at a test of the 200 day MA has been a strategy that has been quite profitable for almost 4 years now.

The next currency I wanted to mention is that of our northern neighbors.  (If you're Canadian and you are reading this I mean you, there is no need to look more north.  I do not believe the North pole has a currency, but if they do I am certain it is rapidly appreciating against the USD as well.)   The USD put in an all time low against the Loonie back in 2008 at 90 cents.  It is currently 98 cents, and at all attempts by the USD to rise against it, have been kept from getting above par for almost all of this year.  Let's keep in mind, this is from a high hit in 2002 of about 1.62.  In other words, the USD has lost almost half of it's value against the Loonie.  Now, here is an example of a country that lost it's AAA rating, balanced it's budget, and regained it again.  They also have a much lower business tax rate than us.  Well, If they can do it why can't we?  I suppose somewhere in the 5th dimension of planet X it may be possible to cut a 1.6 trillion dollar deficit and pay back a 14 trillion dollar debt without causing a catastrophe of epic proportions, but lets also not forget the cardinal difference in the two dollars; The Canadian dollar is backed by and exchangeable for silver, The US dollar backed by...nothing.  Unless you put a lot of faith into the promise of the US government and the Bernank.  By that standard I have a hard time understanding why the USD is as high as it is VS the Canadian.

The next one I want to discuss is the Aussie.  Which I am particularly fond for many reasons.   Being a commodity country it should be no surprise that this currency has been moving higher against the USD.  In fact, the Aussie DID reach a high of 10% higher than the USD.  The growth story is China.  Australia has the materials they want and need, and they are only a hop, skip and a jump away.  Australia maybe for that reason the only "western economy" that makes it out of this mess alive.  If you couple in some beautiful scenery, and warm weather, It shouldn't be a surprise to anyone who knows me that Australia is where I plan to retire in while the SHTF (as well as Kangaroos.  In NYC, you have to deal with rats, eww.  In NJ where I live, you have to deal with deer, which are essentially big rats except I never knew anyone who ever totaled their car from hitting a rat.  At least in Australia their local wildlife hops around in a very amusing manner, and if your in the right place at the right time, you can catch a free boxing match.  I've never seen a rat do that before.)

Finally, lets look at the Swiss Franc, which has gotten a lot of attention recently.  The Franc, which is also at a more than 30 year high against the dollar (again that's as far back as my charts can track it), has been intervened by the Swiss central bank as well do to it's rapid ascent against the USD.  (They're very concerned about their ability to sell those nifty little knives over seas.)  All intervention on their part was wasted effort, as traders quickly reversed it's move and continued it's rise.  The recent news of possibly linking the Franc to the Euro did however scare traders and the dollar was able to make an ever so slight 'pop' against it's waterfall like move downward.  The legality of this is up for debate.  The logic of this is not however.  If you ask me, that comment was simply an "ends justify the means" scenario.  Why the Swiss, or anyone else for that matter would want their currency linked to the Euro is beyond me but for the time being, they got their wish and the Franc pulled back a touch.  All in all, it remains a better place to hold money than USD and will most likely continue to be, and continue to follow gold higher.

Wait, you didn't think I was going to write an article about currencies and NOT discuss the ultimate currency did you?  What can I say about gold?  Hmmm... I guess, hold on.  After rises like the one gold has you can often find yourself in an odd predicament.  On the one side, it's gone up a LOT in a relatively short time frame, so you may be tempted to take some profits there.  On the other, a massive rise like this shows just how much strength this market has and going against the trend can prove to be very unwise.  So what should you do?  Simple, I'll tell you exactly what I am doing.  Hold onto the gold you own, taking profits on leveraged positions is common sense after this run, but don't sell what you rightfully own outright.  As Jim Sinclair said a few days ago, "taking profits on bullion and rolling into good gold shares now is just common sense."  There is a lot of great growing companies out there, and a few that are now paying decent dividends as well, but remember PROFITS!  Don't go and sell all your gold for miners or vice versa.  A good formula has been to have a good amount of both.  The miners do outperform the metal when things are going their way, but when the market moves down 600 points and gold moves up $50, having all you money in miners is a losing day for you.  Bullion hedges your stock market risk, miners offer company growth, massive profit margins and dividends, which is the biggest argument for why bears say not to own gold, because it can't pay a dividend, well the right miners can.  (Granted, those same people will turn around and tell you to sell all your worthless gold and buy Apple, which also does not pay a dividend, but whatever.  Just wanted to point that out.)

Ok, that's all folks.  Remember to keep your hands in the vehicle, leave your seat belt attached at all times and don't forget, this ride has been known to inducing vomiting.  Good luck out there!

-Jonathan M. Mergott