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Back in March I penned the post Gold is not glittering so much these days which made the case that gold was not performing very well and had some significant downside risk. With all of the risk aversion we have seen running through the markets of late, the question has come up as to why gold hasn’t been more of a beneficiary and why money isn’t flowing into that market as it had done before when the markets have gotten really nervous. I think there are two ways to address that.

Not as much fear as in prior times
As much as things have gotten crazy in the markets at different points of late, they haven’t been as bad as you might think. Yes, we’ve seen interest rates moving rapidly, especially in the Treasury markets. That, though, can be at least partly explained by Fed ownership there as I discussed last week.  And yes, other risk markets have taken losses. Things haven’t gotten too bad in the stock market, though. If the markets were really fearful, we’d see stocks being sold aggressively as well.

No money printing by the central banks
The big thing that drove gold in its long uptrend was the money being printed by the central banks such as the Fed and Bank of England while doing their quantitative easing programs. We are not seeing that sort of activity anymore (despite some calling for it). It is important to note that programs like Operation Twist where the Fed buys long-dated Treasury securities and sells short-dated ones does not expand money supply. Gold has basically gone sideways since QE 2 ended last year.

Flagging participation
In my previous gold post I noted that open interest in the front month gold futures contracts had declined, indicating that fewer positions were being held in the market. Also, the volume pattern had changed from surges on up moves to surges on down moves. Both of these patterns have continued in the last few months.

What’s interesting in all this is that gold is clearly sensitive to money supply issues, but hasn’t reacted positively to the talk in the markets recently about central banks doing more policy easing. That suggests two potential conclusions. The first is that the gold market doesn’t really buy the idea that the Fed, BoE, ECB, etc. will be doing big money supply expansions as were done previously. The second is that gold got ahead of itself when it rallied previously, so doesn’t have it at this point to start moving up again. And maybe both factors are part of the story of flat gold.

Looking at the prospects
If anything, I think gold looks worse now than it did when I wrote about it back in March. I said then that the 1500 level was key and that continues to be the case. If the market falls through there we could see a long-term downtrend play out. The interesting thing to watch there is whether the open interest starts rising as the market falls. That might indicate shorts coming in.

In the mean time, the USD Index cup-and-handle pattern I wrote about last month has been broken, creating a strong upside prospect for the greenback. That’s not the sort of thing which tends to be supportive of gold on general principle.

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Be sure to read the full risk disclosure before trading Forex. Please note that Forex trading involves significant risk of loss. It is not suitable for all investors and you should make sure you understand the risks involved before trading. Performance, strategies and charts shown are not necessarily predictive of any particular result. And, as always, past performance is no indication of future results. Investor returns may vary from Trade Leader returns based on slippage, fees, broker spreads, volatility or other market conditions.

Author Bio

It was hard to ignore the swells in yesterday’s U.S. stocks that took place in response to speculation of global policy makers’ possible plans for economic growth stimulation. However, the US wasn’t the only country to see its stock prices move up so aggressively. CNN reported China’s overseas investments surged to more than $21B, as state-owned companies obtained various global resource-related assets.

A report compiled by private equity firm A Capitol revealed that Europe’s delicate state continues to capture the attention of Chinese companies. Drawing them to the scene is undoubtedly the alluring possibility of obtaining equity at undervalued prices. In fact, China’s second largest destination for investment is Europe; which accounts for 16 percent of outbound mergers and acquisitions.

This number has actually fallen from last years reported 37 percent, due largely to a shift in capital interest towards the realm of resource-related assets. One of China’s largest European investments lies in Thames Waters Company, the UK’s largest water and wastewater treatment establishment. Though the exact amount of appropriated equity isn’t known for sure, the investment is valued at about $778B.

With all of the ongoing stresses about Europe’s faltering economic state, it would be easy for one to find solace in knowing that the world’s second biggest economy had its back in a big way. But, then we start remembering, wait a minute, isn’t China’s economy losing footing themselves?

Yes, but this morning the WSJ’s Market Watch brought good news of interest rate cuts in China, information that will undoubtedly ease fears of the country experiencing a slowdown in economic growth. In a statement the People’s Bank of China posted on its website, it was announced that starting June 8, they will lower benchmark one-year lending and deposit rates by 0.25 percentage point.

An economist from Credit Agricole, France’s largest retail banking group, projects the move to be indicative of policy makers “bringing out the big guns.” He explains further the real impact of the reduction will be most prevalent in sentiment amongst businesses, domestic consumers, as well as the markets.

Economist Mia Hong explains that since the focal point of China’s financial reform is interest-rate liberalization, tomorrow’s change will be a near bull’s eye move for shifting things in that direction. She also forecasts the lowering of interest rates could spark a possible reversal in China’s slow bank lending, which has developed due to lower borrower demands.

This sounds to me like all the right ingredients for economic growth stimulation. And it all comes at an integral time, especially with Europe’s wounded economy permeating others around it. The potential for economic failure within the euro-zone should also have US investors weary of an economic domino effect.

Hopefully Warren Buffett was right in his recent statement that the U.S. economy should be safe from a recession relapse “unless events in Europe develop in some way that spills over here big-time.” Right now though, things are heading in a positive direction for everyone. With China’s interest rate cuts strengthening its own economy, more capital will be available for potential allocation into European investments, thus contributing in some way to global monetary rebalance.

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Be sure to read the full risk disclosure before trading Forex. Please note that Forex trading involves significant risk of loss. It is not suitable for all investors and you should make sure you understand the risks involved before trading. Performance, strategies and charts shown are not necessarily predictive of any particular result. And, as always, past performance is no indication of future results. Investor returns may vary from Trade Leader returns based on slippage, fees, broker spreads, volatility or other market conditions.

Author Bio

The yen is an enigma to many forex market participants. It doesn’t trade like the European currencies, nor does it move like the commodity currencies. Oftentimes, it trades against the dollar the opposite way we would expect given the broader market actions.

There are a lot of things that go into yen trading, like the fiscal year-end in March, that make it unique. That has been furthered along in recent times by the aftereffects of the earthquake. This is all within the broader context of an economy that has struggled to do anything for many years now, with little prospect of reversing that any time soon. The low Japanese interest rates as a result have kept the yen at or near the top of the list of favorite currencies to borrow for carry trade purposes.

We saw a lot of the Japanese bugaboos hit the yen hard during the February/March period when USD/JPY rallied from testing 76 to the downside to probing 84 on the upside. That came after many months of the market going sideways at a time when the markets were looking at the US economy improving, which was supporting the dollar.

As you can see from the chart below, the weekly Bollinger Bands got VERY narrow as a result of the long consolidation. The rally since the range break has taken the Band width in the opposite direction, getting it to near its highest level in the last couple years.

The market has obviously since retraced some of the rapid rally, thanks in part to weaker US economic data starting to get traders thinking the Fed may decide it needs to act to further loosen monetary policy. We’ll find out this week just how far down the path that thought really has gone. In the mean time, we have an interesting technical picture.

I’ve added two lines to the weekly chart which represent important levels for the market from here. The upper one is the high from April of 2011 above 85. The lower line is the high from late October and early November that should now be support. Those create a very good set of bounds between which the market can consolidate while the Bollinger Bands work back toward at least a more normal width.

Drilling down a bit, it is worth looking at the price distribution charts to fine tune the analysis. The chart below features monthly distributions (based on daily moves). Where they are thick, the market has spent the most time. Call these attraction zones. Where they are thin, the market hasn’t spent much time there at all. Call these rejection areas.

This month USD/JPY moved down to test the price level from February where the market spent the most time (though granted, not very much because of that month’s trending action). The market has bounced from there, essentially rejecting what should have been a good attraction area. As this was also above the peak from Q3 last year, it can be considered an indication of strength. As a result, I like the prospects for the market to work back up toward recent highs. That is perfectly reasonable, even within an overall consolidation.

So what’s the implication of this?

Well, if the market just shifts into consolidation for a while then I think it probably just indicates a market that overreacted to the recent softer US data (especially the jobs report). If USD/JPY eventually extends the rally from 76 to break the April 2011, it will probably do so on the basis of a combination of the concerns about US growth abating but the same not being the case for Japan. The limiting factor, though, is the trade imbalance. If the US economy strengthens sufficiently to increase import demand, that will eventually flow through to benefit the yen.

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Be sure to read the full risk disclosure before trading Forex. Please note that Forex trading involves significant risk of loss. It is not suitable for all investors and you should make sure you understand the risks involved before trading. Performance, strategies and charts shown are not necessarily predictive of any particular result. And, as always, past performance is no indication of future results. Investor returns may vary from Trade Leader returns based on slippage, fees, broker spreads, volatility or other market conditions.

Author Bio

Obviously, as with any other market, if you want to invest in currencies you need to do your analysis. In many ways, analysis of the Forex market is quite similar to that for government interest rates. Both focus on high-level macroeconomic factors like economic growth and inflation. In Forex, trade and capital flows are very important factors as well.

Plus, the interest rate and currency markets intertwine and influence each other. Higher interest rates can make a currency more attractive. Similarly, trade flows can influence foreign demand for government debt securities, impacting their yields.

But it’s tricky.

When doing analysis in the currency market, you have to look at both sides of the exchange rate equation. This is something that trips up a lot of traders and investors. They think like stock investors and only consider one thing. For example, they look at Federal Reserve policy and make a judgment on the dollar. In the case of playing the dollar’s exchange rate against the euro, though, it’s not good enough to just look at the dollar. One needs to do a similar analysis of the euro because the exchange rate reflects both sides of the equation, not just one side. In other words, proper investment-level analysis of exchange rates requires developing expertise in multiple economies. This is a definite challenge to many would-be Forex investors.

Trading profitably is your other challenge.

It’s been suggested that something like 95 percent of those who try their hand in Forex trading fail. That’s a very dramatic number and not one backed-up by any real evidence. What we do have, though, are actual figures from U.S. Forex brokers provided by mandatory quarterly reporting. They show that in any given quarter only about 1/3 of accounts are profitable (based on data from required quarterly reports made by U.S. brokers to the CFTC).

In other words, despite suggestions the contrary, Forex trading is not some golden path to riches. As with any other endeavor, the rewards fall to the relative minority who really know what they are doing, and who can consistently turn good market analysis into profitable trading strategy. That takes lots of time and loads of effort. Most people come up short.

For that reason, or simply because you don’t have time to do it properly yourself, you can always leave things to others as you might do investing in stocks, bonds or alternative investment approaches.

In previous blog posts, we’ve discussed the managed strategy options out there for investing in foreign exchange. There are ETFs and mutual funds which offer certain types of opportunities. If you are a high-net-worth individual, you may have access to the currency markets through hedge funds. Global macro hedge funds, and certain other types, have been playing in the currency markets for decades.

Well known money manager Paul Tudor Jones was shown trading German marks in 1986 in the Trader documentary. Big funds like currencies because of their high liquidity. There are new alternatives to take part in the currency market now, though, that provide access to the same sort of hedge fund investing at lower capitalization.

For example, there are managed account options where you give someone direct control of your Forex brokerage account to do transactions on your behalf. Obviously, there needs to be a high degree of trust for an arrangement like this, but if you can find someone good it can be a very worthwhile option.

Then, there are programs, like the Currensee Trade Leaders Investment Program, where you can arrange to have the transactions made by one or more other traders in their own accounts automatically duplicated in yours. These can provide more transparency and control than managed accounts, as well as the opportunity to easily diversify among managers.

The Forex market is already influencing your life and financial well-being in ways you may not even realize. Why not put it to work for you? It’s not nearly as volatile a market as many would have you believe, but still offers plenty of opportunity. That makes the currency market a legitimate focus for alternate investment funds.

If you are ready to dive in, then be sure to keep our free e-book “The Smarties’ Guide to Alternative Investing in the Foreign Exchange Market” close to hand.

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Be sure to read the full risk disclosure before trading Forex. Please note that Forex trading involves significant risk of loss. It is not suitable for all investors and you should make sure you understand the risks involved before trading. Performance, strategies and charts shown are not necessarily predictive of any particular result. And, as always, past performance is no indication of future results. Investor returns may vary from Trade Leader returns based on slippage, fees, broker spreads, volatility or other market conditions.

Author Bio

While cookouts and fireworks were certainly on our mind last week here in the US, we still kept an eye on the news. Here’s our roundup of top stories that we’ve read in between all of the celebrations:

After the Federal Reserve ended QE2 last week, many investors are now wondering what’s next for the U.S. economy for the rest of 2011. You can watch the experts debate what they think is next for QE2 by viewing our recent webinar. The good news, however, is that after two years of rapid decline, the dollar is now entering an uptrend, gaining against every major currency. In other news, the 2011 World Wealth Report that was recently released displays the staggering estimate that in 2010, 103,000 people out of 7 billion on the planet controlled 36.1 percent of the world’s wealth. Additionally, the report shows that hedge funds are no longer a favored alternative investment among the class of high net worth individuals. On the international front, the euro continues to weaken as interest rates rise, and China has begun to expand foreign exchange reserves using non-U.S. dollar assets – a sign that investment in the yuan may be on the rise.

• Picking the Brains of the Super-Rich, and Picking Up Tips, The New York Times, June 24, 2011
• The Dollar Rebound and What It Means to the Market, Seeking Alpha, June 26, 2011
• Euro Sustained in Widest Rate Gap Since ’09 as Greeks Vote, Bloomberg BusinessWeek, June 27, 2011
• China Moves Away From the U.S. Dollar; Invest in the Yuan, Seeking Alpha, June 27, 2011
• Why High Net Worth Individuals Are Running Away From Hedge Funds, Business Insider, June 30, 2011
• As QE2 ends, market debates Fed’s next move, Reuters, June 30, 2011

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Be sure to read the full risk disclosure before trading Forex. Please note that Forex trading involves significant risk of loss. It is not suitable for all investors and you should make sure you understand the risks involved before trading. Performance, strategies and charts shown are not necessarily predictive of any particular result. And, as always, past performance is no indication of future results. Investor returns may vary from Trade Leader returns based on slippage, fees, broker spreads, volatility or other market conditions.

Author Bio

We’re in a period where there’s a lot of stuff flying around regarding the future of the economy and the markets. One of the bigger concerns out there for investors and consumers alike is that the quantitative easing the Federal Reserve is doing will inevitably end up resulting in high inflation for US consumers. It’s not hard to think that given how the Fed has basically said it wants to see more inflation because it’s worried about deflation.

The gold bugs have been all over that scenario since the Fed really started getting aggressive with things back in 2008. From Q4 of that year to Q4 of 2010 the price of gold went from lows near $700 to highs above $1400.

You would also expect to see yields on Treasury securities rising in expectation of inflation. While they certainly have done so in recent months, the 10yr Note has only seen its yield get back into the lower end of the band of rates which dominated trading between mid-2009 and mid-2010. They remain more than 50 basis points below the 2010 high as of this writing, though they are indeed considerably above the late 2008 lows.

I’ve done a study on the relationship between inflation and the major financial markets for the period of 2001 to 2010 to see what kind of correlation there is. Below is a chart comparing the US Consumer Price Index (CPI), Gold, the Dollar Index, the S&P 500 index, and the 10-year Treasury Note yield. All were indexed to 100 for January 2001 and have been plotted on a log scale to most easily delineated relative performance.

As we can see quite easily, gold has been by far the strongest performer. CPI has been the only other element of the study showing positive performance over the last decade. Stocks, the dollar, and yields all ended up lower. A correlation study between the five time series shows this:

As we can see, gold has been very highly positively correlated with CPI. By contrast, the Dollar Index has been very negatively correlated to prices. This is what a lot of folks would expect to be seen. It should be noted, though, that the Dollar Index represents the value of the US currency against others around the world, not the purchasing power of the dollar in terms of goods and services, so expecting the Dollar Index to be consistently very closely linked to CPI is a risky prospect.

It’s also worth noting that while rising consumer prices match up with rising stocks, the correlation is not a high one at 23%. Likewise, the negative correlation between stocks and the dollar is not as big at -31% as you might expect given how much press that relationship receives.

A surprising correlation is the -58% between CPI and the 10yr Treasury yield. Keep in mind, though, that this look at CPI is in terms of the value of the index, not the % change. The latter is what tends to drive interest rates. To address that, take a look at this table, which indicates the correlation of year-over-year changes rather than the levels of each market.

Notice here that the CPI/10yr correlation is positive, as would be expected. This study also confirms the close link between equity prices and rates, as highlighted by the 64% correlation between the y/y changes in the 10yr yield and the S&P 500. In other words, stocks and interest rates tend to move in the same direction by closely linked amounts.

One must be careful, however, to expect high levels of short-term correlation. The figures don’t tend to support that. Here is the result of looking at the correlation of monthly changes (as opposed to y/y).

Here we see the correlation with CPI breaks down in all but the interest rate arena, and the stock market has very little trading relationship with the gold market. The Dollar Index, though, shows some persistently meaningful (if not super strong) correlations against with the asset markets.

The conclusion to be drawn from all this is that in the short-term the markets don’t really care that much about inflation (just a bit in the interest rate market, which is to be expected). There are stronger cross-market linkages. Over the long term, though, gold is closely tied to the level of consumer prices. Also, the most persistent correlations – if not always the highest – are with interest rates.

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Be sure to read the full risk disclosure before trading Forex. Please note that Forex trading involves significant risk of loss. It is not suitable for all investors and you should make sure you understand the risks involved before trading. Performance, strategies and charts shown are not necessarily predictive of any particular result. And, as always, past performance is no indication of future results.

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Be sure to read the full risk disclosure before trading Forex. Please note that Forex trading involves significant risk of loss. It is not suitable for all investors and you should make sure you understand the risks involved before trading. Performance, strategies and charts shown are not necessarily predictive of any particular result. And, as always, past performance is no indication of future results. Investor returns may vary from Trade Leader returns based on slippage, fees, broker spreads, volatility or other market conditions.

Author Bio

After the unprecedented stimulus post the Lehman’s collapse, the recent economic data is beginning to expose the cracks in the error in providing such a stimulus without lowering long term interest rates, and therefore stabilising the housing market. Whilst the housing statistics have tended to be given less prominence than other indicators, the decline and problems will resurface as asset prices fall and personal and bank losses mount.  For me, the most telling statistic is the fact that whilst stimulus has had some benefits in the bounce in a variety of areas, the housing stimulus has largely failed, and the recent curtailment is showing the inherent weakness in this crucial sector of the economy.

Mortgage applications have posted fresh lows on a four week average and the bounce from the tax credit was insipid at beast. With single family homes also turning down, this suggests a fresh down leg in house prices is beginning.  The more recent statistics elsewhere highlight sudden weakness with continuing claims remaining elevated and suggesting another poor payroll number for May. Retail sales for May were disappointing, and now we have a weak Philly Fed for June.

With most of the rest of the western world being forced to accept the reality of excessive debt, a key question will be whether any refusal (which appears probable) for America to accept that there unique place in the world as a reserve currency has acted as a buffer, and it cannot live beyond its means forever. This weekend’s announcement from China looks like a clever move to deflect problems at the G20 meet and deflate the possibility of further pressure being placed by America. It was light on details and suggests that any revaluation will be small and slow. It was clear in their statement in how it would help in there need to offset the Euro’s weakness, rather than any appeasement to America. Mr. Obama hopefully knows that China already holds all the trump cards and their reluctance to buy Treasuries in recent months is significant. Any suggestion of outright sells would see long term rates rise significantly and place yet more pressure on an already beleaguered housing market. BP is not the only thing Mr. Obama needs to worry about.

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Be sure to read the full risk disclosure before trading Forex. Please note that Forex trading involves significant risk of loss. It is not suitable for all investors and you should make sure you understand the risks involved before trading. Performance, strategies and charts shown are not necessarily predictive of any particular result. And, as always, past performance is no indication of future results.

Author Bio

A momentous week for Forex as the market was shocked by the Fed’s move to raise rates in the Discount window. This is the rate with which funds can be traded with the Fed, and it was the first time I can remember that this rate was shifted and the Fed Funds rate did not move at the same time. This caused the Dollar to surge and that is not surprising. History tells us that once a change in trend in interest rates begins it is a long time before it shifts back the other way. America now joins Australia in a tightening bias and for the former this has some important underlying dynamics.

For some time now the Dollar has been the primary beneficiary of what is called the Carry trade. This involves borrowing money cheaply here and using it to buy assets elsewhere. This is fine as long as the currency borrowed does not significantly appreciate. We now have the situation where the outlook for cheap borrowing can shift and provides two arguments for further Dollar strength. Firstly, if the carry continues it is more likely that traders will look to hedge the risk of Dollar appreciation by buying Dollars on the forward market, thus creating a powerful underlying bid. Secondly, any further strength opens up the possibility that existing carries can be unwound, or further hedging is needed in order to continue to hold the position. It is also worth noting that the Dollar has been rallying in spite of other news that showed that China was a net seller of U.S Treasuries in November. Whilst this is some way back in history it will become very instructive to the size of the Dollar bid if this trend continued in December and January and is something I will watch closely.

Technically the Dollar slumped alarmingly late on Friday and highlights another market dynamic I look at closely. Moves right at the end of the week are always treated with suspicion due to thin conditions and day traders being forced to exit. This means that Monday’s price action will be very instructive in whether the move was true or false. Compounding the importance is the fact that the EUR/USD settled directly at the point of most time in its downtrend that began is January. When price ends the week at the ultimate point of fair value, it dictates that the market is at a pivotal time and must make a decision on its next trend. It means watching 1.3840 on the upside and 1.3559 on the downside.

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Be sure to read the full risk disclosure before trading Forex. Please note that Forex trading involves significant risk of loss. It is not suitable for all investors and you should make sure you understand the risks involved before trading. Performance, strategies and charts shown are not necessarily predictive of any particular result. And, as always, past performance is no indication of future results.

Author Bio

I have to say that I wish I was trading foreign exchange a bit more than I am at the moment. Actually make that a ton more than I am at the moment. These markets are moving and whether you or trading the AUD, CAD or the Yen we’re seeing enough significant moves to get traders excited and hopefully enjoying profitable trades.

One of the beauties of trading forex instead of say equities is that you shouldn’t be concerned on the direction of the moves either. If you are Long USDCAD this may not be hedging or offsetting other trades. In trading equities you may short the SPX but you are likely to be Long equities elsewhere in your portfolio. Liquidity, tight spreads and 24 hour market access are other good reasons to be involved in forex trading.

On Currensee you can see the positions of both the Community and your team members. My team members have over 100 positions on as I write. That is a nice tidy sum and many of those are with a bit of leverage of well. I’ll have a trade on as well the next time I receive a signal from my intra-day model but last week we missed some opportunities when my Expert Advisor failed to generate signals.

As we all know using Expert Advisors has become common place for individuals trading currency. If you can build a strategy and have your code written properly then you have a mighty convenient tool. It seems that we are all lacking time now-a-days and these EA’s seemingly allow you to do two things at once. Unfortunately for yours truly having that code written properly has become a stumbling block. We’re now reaching out to other experts and will hopefully have this rectified in the not too distant future.

Back to the trading environment, one look at the economic calendar, listed on the Research Dashboard on Currensee, shows a far less crowded calendar of events this week. A CGPI (PPI) figure out of Japan, US retail sales and GDP figures out of the Eurozone don’t exactly measure up to the direction that can be provided from NFP, ECB and G7 meetings. This should be viewed as a positive item for traders with winning strategies right now. There will be fewer speed-bumps to derail those trades that have been put on.

This should keep the focus on sovereign debt concerns, benign global interest rates and other hot items impacting markets right now. Following these items is easy enough using the Feeds widget on Currensee. This provides various top economic headlines from around the globe from multiple news organizations. Among the headlines that are Feeding as I write are stories on the Toyota recall, Chinese economic growth and Trichet’s visit to Sydney. More than a few items that traders may want to pay attention this week. Thus if you are looking for trader positioning, economic news releases or live news feeds the place to be is on Currensee.

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Be sure to read the full risk disclosure before trading Forex. Please note that Forex trading involves significant risk of loss. It is not suitable for all investors and you should make sure you understand the risks involved before trading. Performance, strategies and charts shown are not necessarily predictive of any particular result. And, as always, past performance is no indication of future results.