Sunday, January 11, 2009

Potential Dollar/Inflation Hedges

I want to be like Jim Rogers and just buy a basket of Commodities and Foreign Currencies and wait for the inevitable collapse of the US Dollar and the US Bond Market, and the corresponding parabolic advance in Precious Metals, Commodities and the Chinese Yuan.

I could just go buy stuff, put it away and forget about it for the next decade. I could use the old Wall Street mantra of “Buy and Hold” and other bs like “It isn’t a loss if you don’t sell it”.

But I have to live in the Real World. We all look at our statements either daily or monthly and know exactly how much money we have. We then calculate our future expectations based upon the pile of money we possess. I think the volatility in Commodities and the Currency Markets pose significant risks to portfolio balances for what may be many months.

If you are down 40% on your stock portfolio, then the fact that you have not sold gives you little solace, because –

A. You are down a heck of a lot right now and need to reconsider your ability to finance future goals or recalculate expectations of your future retirement age or lifestyle
B. You did not have the foresight to sell before the account fell 40%
C. Therefore, you do not know if selling now is the right or wrong thing to do
D. Now you wonder if your “professional” Advisor or “Money Manager” has any clue about what they are doing

My job in 2008 was to protect assets. I saw this coming.
My jobs in 2009 are to reinvest money if the markets turn up and help those who are down a lot get back on track.

When people are emotional from losing a lot of money, they often try and make their losses all back on one big bet.

I think betting huge right now on Stocks, Currencies, Metals or Commodities would be nothing more than an emotional stab to try and catch the new potential Asset Bubble that we all know the Fed is hell-bend on inflating and avoid the potential Long Term risks to US Dollar-denominated assets.

I’ve mentioned this before. But my brother once told me the following – “The markets move to the most obvious place, in the most painful manner possible.” He’s one smart dude…

I want to walk you through the thought process I am using for determining when to start building big positions in hedges against rising Inflation and Interest Rates and a Falling Dollar.

Here are the Long Term Charts on a few significant assets. Remember, you want to be buying when Price is above and pulling back into the Blue and Red Lines. You want to be shorting when Price is below the Red and Blue Lines and is rallying up into them.

US Dollar ($USD)
The US Dollar broke multi-decade support in September 2008 (Green Arrow and Line), after the Fed ramped up the printing press and in order to avoid a Depression, flooded the World with cheap money.
The US Dollar then staged a massive rally and got back above old support, as investors realized that the US Dollar was the only currency for international transactions and other Central Banks accelerated their own money printing presses.

The Euro ($XEU)
Think of the Euro as the mirror image of the US Dollar. The Euro broke to new highs as the Fed started to print lots of new Dollars, and then crashed as investors sold their Euros and bought Dollars as the only viable safe haven.
The European Central Bank will soon be cutting their Interest Rates in their own form of Quantitative Easing. That will fundamentally weaken the Euro versus the Dollar and may or may not have been priced in.

The US Dollar is now pulling back into support and the Red and Blue Lines. The Euro has now rallied up into the Red and Blue Lines.
That means that I should be looking for entry points to buy the Dollar and short the Euro.

The Australian Dollar ($XAD)
I use the Australian Dollar as a proxy for the currencies of commodity-based economies. I consider it to essentially be an Emerging Market currency and it has been hammered on a combination of economic uncertainty, the slowdown in China and the implosion in Commodity prices.

The Japanese Yen ($XJY)
The Yen has broken above significant resistance (Green Line) and has been able to hold its gains. Since the Nikki peaked in 1989, the Yen has been so manipulated by Central Banks, that I have no clue how it will trade.
I assume that it will trade between 100 and the old high of 122 for a long time. But I am not real concerned about it as a potential asset, because its effect yield is zero! Why take risk on a currency hedge that offers no yield?

The British Pound ($XBP)
The UK just cut their version of the Fed Funds Interest Rate to its lowest level on record (I think their records started in 1697), so it is not a surprise that the Pound is testing multi-decade lows.Moreover, the UK Real Estate Market is at least as bad as the US Real Estate Market and their Financial System is a leveraged up on bad mortgages as ours is. The Pound printing presses are now also running 24/7.

In order to raise Exports, there is a competition to see who can devalue their currency fastest. The fact that so many Central Banks are printing money to try and cheapen their currency and inflate away all of the bad debts that are choking their economies is cause of great concern for me.

My goal is to protect long term purchasing power from the impact of rising inflation and a falling Dollar. It may turn out that many of the currencies I want to purchase will lose value relative to inflation, just as quickly as the Dollar will.

The Swiss Franc ($XSF)
This may end up being my savior.
Look at the chart versus the chart of Gold ($GOLD). They look the same.

Look at how they have traded over the past 3 years (Gold – Black Line) (Swiss Franc – Red Line).
Look at how many times they have topped on exactly the same day (Blue Arrows)!

That tells me that investors consider the Swiss Franc to be a storage of Purchasing Power relative to Commodities and Inflation.
It also tells me that Switzerland is considered to have a credit quality on par with that of Gold.
This is a revelation! Will Switzerland reestablish itself as the World’s trusted banking center? It already seems to be doing so.
The Swiss Franc and Gold have very high probability of being your hedges against Quantitative Easing!

I thought this post would take a different turn today, but I now don’t really need to go any farther than figuring out the best entry points for buying Gold and the Swiss Franc. When I do enter these, I may hold them for 5 to 10 years. I may end up holding HUGE positions in these.

Gold (GLD)
Gold peaked in early 2008 and has been consolidating its 2007 gains for almost a year. That is Bullish – think pullback in an Uptrend. The Black Lines define the consolidation.
GLD is the ETF for trading Gold. GLD equals the approximate price of Gold divided by 10.
There was a lot of volume on GLD in the 85 – 95 range. The recent rally in GLD has tested 85 for the second time. I may take a little more time to break through that range.
GLD is also running into a key Long Term moving average (Blue Line – 200 day) at 85. This is offering resistance.
The 455-day (Green Line) should offer substantially support. If price breaks decisively below the Green Line, then the Gold Bull is dead for what may be several years.
This is a critical time for Gold. I will put Stop Buy orders in above the top Black Line in the 87 range to start buying GLD.

Swiss Franc ($XSF)
The Franc has had a much more violent trading range than Gold. It went vertical following the US quasi-nationalization of Citigroup in December 2008.

I will put Stop Buy orders in above the Black Line and Limit Buy orders in the low 80s.

I expect to be stopped into and out of GLD and $XSF several times before the trade actually sticks. But if it sticks, then these two holdings may prove to be critical to the performance of a portfolio in the next several years.

If you want to read more about the interrelations between the US Dollar, the Yen and the Yuan and the relative inflation rates of each country, then read this post from Friday. I found it very informative.