Browsing Category: "Forex investment"
How to profit from the coming Greek default … Five trades to make before the euro implodes … You don’t exactly need a crystal ball to know what the biggest event in the financial markets of the next 12 months is going to be: Greece defaulting on its debts. This week Standard & Poor’s cut its rating on the country to CCC, the lowest of any nation in the world. Only last week we learned that Greek industrial production was down 11% year-on-year. Unemployment has risen 40% over the past year, and now stands above 16% nationally. – Matthew Lynn, Marketwatch
The US dollar will lose its status as the global reserve currency over the next 25 years, according to a survey of central bank reserve managers who collectively control more than $ 8,000bn.
More than half the managers, who were polled by UBS, predicted that the dollar would be replaced by a portfolio of currencies within the next 25 years.
That marks a departure from previous years, when the central bank reserve managers have said the dollar would retain its status as the sole reserve currency.
UBS surveyed more than 80 central bank reserve managers, sovereign wealth funds and multilateral institutions with more than $ 8,000bn in assets at its annual seminar for sovereign institutions last week. The results were not weighted for assets under management.
The results are the latest sign of dissatisfaction with the dollar as a reserve currency, amid concerns over the US government’s inability to rein in spending and the Federal Reserve’s huge expansion of its balance sheet.
“Right now there is great concern out there around the financial trajectory that the US is on,” said Larry Hatheway, chief economist at UBS.
The US currency has slid 5 per cent so far this year, and is trading close to its lowest ever level against a basket of the world’s major currencies.
Holders of large reserves, most notably China, have been diversifying away from the dollar. In the first four months of this year, three quarters of the $ 200bn expansion in China’s foreign exchange reserves was invested in non-US dollar assets, Standard Chartered estimates.
The prediction of a multipolar currency world replacing the current dollar dominance chimes with the thinking of some leading policymakers.
The prediction of a multipolar currency world replacing the current dollar dominance chimes with the thinking of some leading policymakers.
Robert Zoellick, president of the World Bank, last year proposed a new monetary system involving a number of major global currencies, including the dollar, euro, yen, pound and renminbi.
The system should also make use of gold, Mr Zoellick added. The results of the UBS poll also point to a growing role for bullion, with 6 per cent of reserve managers surveyed saying the biggest change in their reserves over the next decade would be the addition of more gold. In contrast to previous years, none of the managers surveyed was intending to make significant sales of gold in the next decade.
Central banks have bought about 151 tonnes of gold so far this year, led by Russia and Mexico, according to the World Gold Council, and are on track to make their largest annual purchases of bullion since the collapse in 1971 of the Bretton Woods system, which pegged the value of the dollar to gold.
The reserve managers predicted that gold would be the best performing asset class over the next year, citing sovereign defaults as the chief risk to the global economy.
The yellow metal has risen 19.5 per cent in the past year to trade at about $ 1,500 a troy ounce on Monday, buoyed by the emergence of sovereign debt concerns in the US as well as eurozone debt woes.
The yellow metal has risen 19.5 per cent in the past year to trade at about $ 1,500 a troy ounce on Monday, buoyed by the emergence of sovereign debt concerns in the US as well as eurozone debt woes.
Before beginning today’s market commentary I want to thank Serge Berger for his insightful analysis and comments on the market during my vacation. Serge was so well received his articles will continue to appear in the Daily Trader’s Alert.
My recent vacation to celebrate my 50th wedding anniversary took my wife and me to several European capitals that have been recently in the news. While there, I took the opportunity to chat with average citizens (cab drivers, hotel employees, etc.) about their general outlook toward the European community’s problems.
In Athens we arrived two days after the police crackdown at Constitution Square and saw the many placards and signs demanding reforms. And like the demonstrations in Rome at Pantheon Square, where we stayed for three days, a trade union supported by the Communist Party did most of the marching, demanding even more liberal reforms.
Much of what we saw and heard confirmed that politicians in all countries find it almost impossible to take back what they have given. Many average folks would rather go back to their old currency. As one cabby put it, “Before the euro a loaf of bread cost half a euro, equivalent in lira, now it costs a full euro.” We concluded that politicians will most likely give in to the demands of the masses despite the need for drastic cutbacks in spending.
In Rome, since Piazza Pantheon is situated very close to many government offices, we were amused to see what appeared to be minor government officials being chauffeured daily in their black Lancias and BMWs. Those with the sticker “Public Service Official” (rough translation) on the windshield received special police escorts and often backed up traffic to allow them to park at favored spots or cut through lines of traffic.
“Some pigs are more equal than others,” to coin a phrase from George Orwell’s Animal Farm.
Conclusion: Despite encouraging words from senior European leaders, the chances are that the established system of giveaways that is part of European political life will continue and so will their debt crisis. Just as we departed Rome the newspapers were carrying the story of Moody’s threat to downgrade 16 Italian banks.
On Friday the S&P 500 closed lower for the seventh time in eight weeks. But despite the selling pressure the important support zone at 1,250 to 1,260 appears to have held again, and on Thursday the 200-day moving average (red line) rebuffed the sellers for the second time in six sessions. But the tone of the market is ominous as money is seeking a safe haven. On Friday the 3-month Treasury Bill Yield fell to .01% for the second time this year.
Major support lines can hold for two times but a third or fourth attack usually results in a breakdown. The moment of truth will likely occur soon since the 20-day moving average (green line), now at 1,290 is falling rapidly and is squeezing prices against the 200-day moving average–a major support line which if broken would most likely plunge the index through the black support zone, as well. Friday’s stochastic indicator flashed a warning signal and will issue a clear sell signal if its “fast line” (red) turns sharply lower with a cross of the blue line through the red. A rally that holds above the 20-day moving average at 1,290 and the recent high close to 1,300 is needed to reverse the current threat of a breakdown.
Perhaps the most influential key sector in the overall market decline has been the Financial Sector, as measured by the Financial Select SPDR ETF (NYSE:XLF). And on Friday that group again led the market lower.
Currently the index is trading within a major support zone at just over 14.50 to just under 15. Looking back the sharp decline in May resulted in a crossing of the 200-day moving average (red line) by the 50-day moving average (blue line). This unfavorable signal bears the ominous title of “Death Cross” since many technicians interpret this as a very bearish sign. There is little evidence to show that the cross has much long-term meaning, but there is much evidence of shorter term significance. I’m inclined to give significance to it only if it is accompanied by other negative signals like the Stochastic Sell signal issued on Friday. The trend for the XLF is down and a break through the major support zone could have major impact on the overall stock market. In order for the XLF to reverse the negative indicators, it would have to close above the recent double top at around 15.20. This index should be closely monitored as an advance indicator of a future overall market direction.
As a result of Europe’s financial problems there has been a mini flight to the dollar. And on Thursday, the PowerShares DB US Dollar Index Bullish ETF (NYSE: UUP) broke through its bearish resistance line on an intraday high and followed it with a closing break through a wedge on Friday. This is a near-term bullish signal for the dollar but a short-term negative for stocks and commodities . In order for UUP to confirm that a long-term trend reversal has occurred, it needs to close above the May high at $ 21.86.
Conclusion: The shorter-term direction of the market turned bearish when the S&P 500 closed under its intermediate trend line in May. Now the evidence is growing that the long-term trend is under attack. But despite the negative overtones there is not enough evidence to say that we are entering a bear market. We’ll let the market tell us of its future direction and the charts included with today’s market outlook should help to focus us on the prime market movers.
The chaos of a currency collapse
Last month Belarus witnessed the effects of a collapsed currency when the Government cut the rouble’s value against the US dollar by almost half. Previously 3155 roubles would buy a dollar but in the blink of an eye they decided 4930 would be needed. This was not even the reality because perception of the collapsing currency meant the situation was even worse as people scrambled for foreign exchange on the black market where you needed at least 6000 roubles to buy a dollar. So what sparked this crisis? President Lukashenko had promised to raise public sector wages by a third during his election campaign, which he duly carried out. This was sustainable only because of the support Belarus received from Moscow in terms of loans. However, as fears grew about the country’s finances, support from Russia waned and even near neighbours from the EU didn’t fancy the risk thus sparking a sharp drop in confidence in the currency. The consequences of a collapse Shelves quickly emptied of food and any “tangible asset” that would hold value better than their currency Wide spread panic broke out as the economy effectively became paralyzed and people suddenly realised their currency was of diminishing worth. Shops were quickly emptied of everything that could be bought. Everyday food was snapped up at “luxury” style prices as people thought of survival but also they also bought electric goods like toasters, microwaves, canned goods and virtually anything that was for sale as they rushed to convert their currency into “any tangible assets” that were not losing value as quickly as their roubles. The human cost was quickly evident from the stories of employees sent on unpaid leave as companies also struggled to cope and comprehend the impact. Andrei, a computer company employee explained how he queued for a week in Minsk trying to buy dollars but didn’t even get one. “In just one month, I have been made bankrupt, the entire country is bankrupt” he said, adding that “even during the Soviet collapse we never suffered such a nightmare”. There are many more stories of hardship, families without food or the means to buy any, shops without stock for them to buy even if they had the means. Dmitry who is a 48 year old factory worker explained how he closed his bank account to get out 5 Million roubles in cash so he “could buy something before my money turns to dust”. Tensions are growing as many people blame the President for mismanaging the economy. Which country is next? This may all seem so far away from wherever you are reading this but the causes of currency collapse may be closer to your doorstep than you think. How many countries are in deep debt and reliant on support loans and bailouts right now? What happens when the support cannot be maintained? It could be the US Dollar, the Euro, the Yen who knows? Globalisation has been the buzz word for expanding Capitalism but it also means that economies are now inextricably linked and inter-twined to such an extent that when one sneezes they all catch a cold! Remember the level of Sovereign Debt is spiralling out of control in the US, Greece, Ireland, Portugal and others are close behind such as Spain and the UK. Austerity measures in all countries are hurting normal folk badly – they are losing their jobs, suffering pay freezes, inflation and pension erosion. Social unrest and industrial action looms large across Europe and this will itself impact the recovery and debt repayment. This has already started in Greece, Portugal, Ireland and large scale protests in the UK are gathering momentum with the Autumn likely to be the boiling point of anger. The discontent and despair of regular folk is understandable as they are bearing the brunt of all the hardship and it just isn’t fair. There is now even talk of a “sub-prime” type problem in China because of over-indulgence in property speculation, leaving huge swathes of developments empty or under-occupied and therefore leaking money and ready to default. We need more than lip service! Mainstream news outlets are all controlled by self-interest groups (private and Governments) and they never provide the whole story about global economic frailty as there would be worldwide panic if they told the truth. The situation right now is on a knife edge and the next Belarus is not far away. Politicians won’t admit it but then again they won’t suffer like the rest of us as they’re all rich enough and well connected to see out any storm. They care too much for their own popularity to be honest. Remember what happened when panic struck in Belarus, people bought any tangible asset they could because it would maintain value better than their currency. Currency is not a means of preserving wealth because it has no inherent value especially when confidence is lost – then it is just a piece of paper. The only real money available is a tangible asset that maintains its value whatever happens to printed bits of paper currency – and that is gold! A lesson on Money and currency We need to understand the difference between money and currency as one is real and the other a promise. Money can be defined as a medium of exchange and a store of value and until fairly recent times was in fact coins made out of precious metal with an intrinsic value or for ease of use, notes backed by precious metal. A days wages in Germany 1923 The problem is that fiat currency runs the risk of central bankers printing too much and causing large inflation or worse. The more that is printed the more the currency is debased just as the Fed is doing now with the dollar. This has been going on for decades with central banks indiscriminately creating money to cover expenditure and ever increasing debt. There are examples throughout history and in the 20th Century most of us are aware that in Germany in 1923 it would take a barrow load of Deutschmarks to buy a loaf of bread but an ounce of gold could buy a reasonable house and one dollar was worth 4 trillion marks. This irresponsible printing of money has eaten away at the value of the world’s reserve currency the USD dollar and dollar based assets, to such an extent that they have lost 82% of value since 1971, the year the US cut links with the gold standard. The GBP has fared even worse that the USD losing around 85% of value since 1971. There are many illustrations of then and now and how owning gold with intrinsic value would have more purchasing pro rata than currency. E.g the latest model Cadillac Eldorado would have taken 180 ounces of gold at $ 42.02 to pay the showroom price of $ 7,546. This same 180 ounces is now worth over $ 200k and would buy two Cadillac convertibles with enough left over to fuel to first service. In the UK an average family car cost £1000 around 60 oz of gold and now the same would cost £17000 around 23 oz of gold. The 60 ounces would have bought the same family car for you a sports car for your wife and a hatchback for your son or daughter. Gold retains its purchasing power year after year. Not long ago the gold standard imposed monetary discipline on countries as they had to hold enough gold to cover the money in circulation but this all changed with the Jamaica agreement in 1971 when the decision was taken by President Nixon on the 15th August 1971 to suspend the direct convertibility of dollars into gold, the keystone of the financial system created in July 1944 (the Bretton Woods Agreement). On the 1st October 1971 the general assembly of the IMF asked the board of trustees to study and propose a comprehensive reform. This would be adopted by member States during a meeting held in Kingston (Jamaica) on the 7th and 8th January 1976, and included a set of provisions which put an end to the reign of gold. The US money supply in 1971 was $ 776 billion and quickly became an upward curve which rose dramatically over the last decade where the US money supply doubled from below $ 7 trillion to $ 14.3 trillion indicating that spending is out of control. The US National debt is now greater than this! The US though still likes to play the rich kid on the block and bizarrely gives aid to those supporting its debt as a report in the Daily Mail of London illustrates: The Congressional Research Service released the report last month which shows that in 2010 the U.S. handed out a total of $ 1.4bn to 16 foreign countries that held at least $ 10bn in Treasury securities. Four countries in the world’s top 10 richest received foreign aid last year with China receiving $ 27.2m, India $ 126.6m, Brazil $ 25m, and Russia $ 71.5m. Mexico also received $ 316.7m and Egypt $ 255.7m. And yet despite the massive outgoings in foreign aid, the receiving countries hold trillions of dollars in U.S. Treasury bonds. China is the largest holder with $ 1.1trillion as of March, according to the Treasury Department. Brazil held $ 193.5bn, Russia $ 127.8bn, India $ 39.8bn, Mexico $ 28.1bn and Egypt had $ 15.3bn. Greece figures predominantly in the spotlight and unrest is growing – will the Government have to mortgage the Acropolis and Parthenon or even sell them off to pay their debts? As discussed in the example of Belarus, chaos ensues when currencies collapse and regular folk suffer badly as they don’t see it coming or refuse to believe it could happen to them. Be warned: A currency collapse is coming near you. In summary: I rest my case!
Thu Jun 16 2011 19:41
To exacerbate the problem there was a shortage of foreign exchange currencies, dollars or euros, in the country.
The empty shelves throughout the towns seemed eerily reminiscent of the Soviet controlled days.
Shoppers knew that anything they could purchase could be more useful as a form of barter than the diminishing currency in their purses and wallets.
Staple food supplies are now hoarded but people feel anxious that unrest is starting that could spill over into conflict at any time.
Revolution is always more likely when the population are starving.
Greece, Ireland, Portugal, Spain, Italy, Japan, USA, Belarus and virtually all of Eastern Europe and the Euro zone (only they never put it in the headlines!)
Currency Collapse.
But even if it isn’t your currency that collapses what will be the knock on effects in every developed country if one of these currencies collapses?
The same as in Belarus.
Politicians spout their practiced rhetoric about how to fix things but the reality is they just don’t care that much as they are not the ones affected. They have means to isolate them from the hardships and many of them are actually responsible for producing the mess. How can they care about regular people or preach what we need to give up when they don’t – ever met a poor politician? Enough said!
Posh boys and rich kids rule the world and their assets are well protected in advance.
This phenomenon is happening daily – your bank account is the best place to keep currency if you want it to devalue!
Money, when considered as the fruit of many years’ industry, as the reward of labor, sweat and toil, as the widow’s dowry and children’s portion, and as the means of procuring the necessaries and alleviating the afflictions of life, and making old age a scene of rest, has something in it sacred that is not to be sported with, or trusted to the airy bubble of paper currency. Thomas Paine (1737 – 1809)
Currency is still a medium of exchange but is not a store of value as it only derives its value by government degree or “fiat”. It’s value is based on the issuing the authority’s guarantee to pay the stated (face) amount on demand, and not on any intrinsic worth or extrinsic backing. All national currencies in circulation, issued and managed by the respective central banks, are fiat currencies.
The U.S. is providing hundreds of millions of dollars of foreign aid to some of the world’s richest countries – while at the same time borrowing billions back, according to report seen by Congress.
Maybe it’s just additional interest on the debt to keep them sweet!
Clearly they can never work their way out of this debt because they would have to increase GDP by 12% a year for 30 years in order to grow their way out of debt.
The Sovereign Debt crisis is well and truly out of control and the only solution will be to default on the debts and devalue currencies.
Be prepared: don’t put faith in bits of paper which have no inherent value.
Protect yourself: Invest in tangible assets that hold real value at all times, especially during a crisis.
Remember: Real money has inherent value, it is worth something because of what it is not because of what is written on it.
Now you know why people buy gold to protect themselves from crisis – it always holds value and is the only real money.
• Currency is not money and its value can be changed by monetary policy makers
• Currency can be created and printed at will with no substance to support it
• Currency depreciation in value is accelerating with subsequent loss of purchasing power
• National debt is increasing to disastrous levels with threat of sovereign debt default
• Confidence in the USD is waning and its use as a reserve currency is under threat
• Countries and investors are shedding their dollar assets
• Central Banks are diversifying into gold and out of dollar assets
• Smart investors are diversifying their portfolios with a proportion of gold
• The value of gold has been consistent in retaining its purchasing power
• Gold is insurance for your wealth
• Gold is the only real money
The biggest problem with investing the markets today, is that we’ve entered a period in which not one country, but most of the developed world is entering a currency Crisis.
Of the countries that back major currencies the Europe, the US, and Japan all face major debt restructuring issues. In different terms, we are witnessing the slow-motion collapse of the entire paper-money based financial system, as well as the unbridled credit growth such a system fosters.
What this means is that we will be witnessing extreme volatility both to the downside and the upside as these currencies “race to the bottom.” The reason for this is currencies all move in relation to one another. So if the Dollar takes a hit, the Euro will rally regardless of the latter currencies problems. The same situation applies across most asset classes as every major currency move is tightly correlated to stocks, commodities, and bonds. Tip #1: So the primary attitude to take in trading these markets is to stay alert and be nimble. Follow the trend, but when it changes, get out. And don’t be too married to a particular forecast.
However, be aware that maintaining this attitude will result in a lot of accusations from others. Case in point, I have forecast that the Fed will be unveiling QE 3 or some other liquidity program in the future.
However, my timeline changed on this when Bernanke and the Fed failed to hint at this in his recent speeches and FOMC meetings. In fact, I warned that we may indeed see another round of deflation before the Fed unleashes another round of QE.
I took a lot of flak for this because many people believed that I had completely betrayed my earlier forecast and was flip-flopping. However, it was clear based on the Fed’s statements (and the lack of hints of additional liquidity) that the Fed was going to ease back on the money printing at least temporarily.
With those market props out of the way, the stage is set for a sharp correction in stocks and commodities. We’ve already seen some major drops in the latter group. However, stocks still have plenty of room to “catch up.”
So if you’re not prepared to profit from the market’s correction, you NEED To download my FREE report devoted to showing in painstaking detail how to make SERIOUS money from a stock market collapse.
I call it The Financial Crisis “Round Two” Survival Kit. And its 17 pages contain a wealth of information about portfolio protection, which investments to own and how to take out Catastrophe Insurance on the stock market (this “insurance” paid out triple digit gains in the Autumn of 2008).
Again, this is all 100% FREE. To pick up your copy today, go to http://www.gainspainscapital.comand click on FREE REPORTS.
Good Investing!
Graham Summers
