July 16,2011 “Give me a place to stand, and I will move the Earth.” ArchimedesThe first thing I do when trying to look for investment or trading ideas in the exchangetrade markets is look for a place to stand. What is out there that I can confidently use abase belief from which to judge all the moving parts of the global economy and markets.This seems to be especially necessary in the current circumstances.December of 2008 I started with a very strong belief that the Fed would maintain thezero interest rate (zirp) policy until the 2010 legislative elections at a minimum. Thatbedrock belief at the time served me well as a starting point for developing a marketstrategy.That is no longer a solid base from which to drive ideas but finding a replacement isproving a challenge. I began by scanning through the charts and here are three gave me abase view I believe is solid.Gold: This chart goes back 2 years but the real uptrend goes back much further than asthe 2nd chart shows. The lower chart begins in the late 1800’s with $16 up to $1562 peroz. This chart is a log chart and each grid line is a double in price. That is an uptrend!
This next chart is the ADXY or Asian Dollar Index comprised of a number ofprominent asia-pacific currencies. The chart is in a strong steady uptrend andalmost perfectly matches the 2 year Gold chart.ADXY IndexThe third solid trend is the relentless strength of the Swiss Franc over the dollar and theEuro.The common denominator among these three is that they all are alternatives to the USD ,Euro, and Yen bloc ofof developed market currencies that have served as the maintrading currencies for the last decade and a half. The developed world currencies aresteadily being debased as a backdoor mechanism for dealing with poisonous levels ofdebt. Devaluation and inflation are the tools of choice for cowardly politicians Wealth isseeking asylum and Gold and the Swiss have historically filled that roll and now theemergence of Asia economies and un-indebted currencies promises to add a little growthto a non dollar/euro portfolio.I do not see the anti US/Euro currency sentiment changing in any material way given thespinelessness of the current political leadership in Europeand the US. Until the equivalent
of a Volcker backed by the resolve of a Reagan emerges in western politics these 3 trends willcontinue. Proof of the spreading doubts about the value of fiat currencies backed by promisesfrom dissolute legislators and toothless central bankers is visible in the next chart. Decliningofficial global gold reserves which declined for 40 years have turned up. Non US and Europeangovernments are now accumulating gold in their reserve portfolios. These counties are forgoingcurrent interest income in order to protect the real purchasing power of their national savings.Central bankers and treasurers are the most inside of insiders and they are voting with their feet.The simple approach taking advantage of this data is to buy gold. A reasonable strategy.But there are negatives. First even though the strong gold trend has been pronouncedsince Nixon took the dollar off of the gold standard, there still have been long periods offlat or correcting prices which provide no return. A second negative is that gold must besold in order to realize any gains since it has no cash flow to the holder.The Swiss currency does offer a small interest return but is at risk of political attempt toprotect Swiss industry by weakening the historic prudence of Swiss monetary authorities.In fact this past year the Swiss Central Bank took billions of dollars in losses as it tried tohold down the value of the CHF. Such behavior is a worrying crack in the foundations ofCHF integrity.The ADXY Index offers up some interesting possibilities. Comprised of CNY, HKD,INR, IDR, KRW, MYR, PHP, SGD, TWD, THB the index is therefore still a productback by fiat paper currencies with the attendant risks of all paper money. The differenceis in the fiscal, debt, and growth circumstances of economies. Over 60% of the globalpopulation is in this region and yet only around 25 to 30% of global capital is invested
there. The next several decades is going to see these ratios balance out considerably. Thewest is hobbled under excessive debt and will not be able to match the pace of emerginggrowth. Higher growth and far less debt will support better returns and much betterprotection of purchasing power of these currencies. These markets will be stronger andgrow faster. Damon Runyanonce wrote: “The race goes not always to the swift, northebattle to the strong, but that’s the way to bet.”I agree with Damon. Gold and the Asian currencies are the way to bet over the next fewyears. Outright longs and relative value trades should be a staple of the portfolio. Shortpositions will viable at times of course but, those should be viewed as trades only. Thedefault view is bullish.As a reminder of the dangers of fiat money look at this last chart. The orange is the S&Pcomposite nominal gain since 1870. These are pretty impressive gains. The green is thereal change in the S&P composite corrected for the destruction of the purchasing powerof the dollar over the same period. The difference is robbery without a gun by politicalcharlatans. It is no accident that congressman begins and ends with “con man”.The next step I plan to take is to develop some kind of rotation strategy to stay long thestrongest 4 or 5 members of the ADXY along with gold and rotating as necessary. A
second approach will be to do the same thing but substitute solid dividend paying equitiesof those same countries in addition to just currency exposure. The objective is to earn asolid return ( say 10% ) above the rate of dollar inflation on a base portfolio. The shorterterm trading strategies being developed can then provide the real kick into moreambitious return goals.