World Currency Watch: FOREX Market, FOREX Trading BLOG

A New Reason to Buy the Loonie

Confession: I always love to read about the central bank gatherings.

Whether it’s an all-out European Central Bank meeting or just an informal grouping of Fed-Heads, there is ALWAYS interesting currency information you can learn from these meetings.

Plus, it’s fairly easy to get your hands on information about any central bank gathering considering the media types practically falls over each other to report on anything central bankers say (and out-of-the-mainstream writers like myself focus on what they perhaps don’t say).

“Recovery Coming” According to Leading Central Bankers

Just take the most recent gathering of central bankers in Wyoming last week. Federal Reserve Chairman Ben Bernanke hunkered down with central bank governors from Italy, France and Japan.

Their purpose? To figure out how to stop stimulating the economy without slowing the recovery.

After meeting, the Central Bankers and governors seemed to pat themselves on the backs and agree that the global economy was recovering quite nicely. Nothing to worry about…at least according to them.

What does this tell me? Well, frankly, I’m inclined to believe them. Or at least, trade off their beliefs. Why? Well, even if these central bankers are overly optimistic, there are countless traders out there that are willing to follow what they’re saying. As a Forex trader, you have to follow what the herd is doing or you’ll get trampled.

Again, as I said, there are always interesting tidbits to take from these meetings. As you can see, the Wyoming meeting was no exception. They basically told us to trade as if the global recovery is already underway.

Overall, it’s the very reason I’m betting on the Canadian dollar. Let me explain…

Who’s Currency Will Benefit Here?

If you’re looking at the global economy in terms of a global recovery, then you have to consider which currencies will benefit and suffer from a recovery.

First and foremost, the U.S. dollar and the yen will be the primary currencies that get hurt (in the long run, even though the buck could get a short- term bump up in the near-term).

Meanwhile, any global recovery will mean that nations around the world will start buying oil again. That will push up prices, and a few key commodity currencies including the Canadian dollar.

I believe that you will see USD/CAD suffer from the “fall of the dollar” and from the “rise of oil.” Therefore, those that are short the USD/CAD pair over the coming weeks to months should benefit from these fundamental forces in play.

Short USD/CAD & Watch the Profits Roll In…

As economies expand, money will pour out of the defensive posture that pushed up the dollar and yen last year. That will shove up a handful of riskier currencies that have more upside potential in an expanding economy.

Bottom line: Watch for the Canadian dollar to rise and the greenback and the yen to “fall off” in the weeks ahead, as investors wrap their head around the idea of a recovery.

Happy Trading!
Sean Hyman, Professor FX

The Latest “Day Trader” Playground

Remember the “day trader mania” when the Internet and Tech bubbles hit back in the late 90s? Remember the Chinese stock market bubble back in 2007 when daytraders couldn’t get their hands on enough China shares?

Well there’s a new “day trader playground” in town in 2009. Only this time it’s in Russia…

You see, last year was tough on the entire world, but it was especially rough on Russia. The “R” of the “BRIC’s” actually had one of its worse years ever for both stocks and its currency, the ruble. Russia is a huge commodities-driven economy with plenty of natural resources to sell to the greater world.

So both Russia’s currency and stocks crashed hard last year when both the global economy and natural resources fell off the map.

After a year of ravaged markets, Russia’s largest stock exchange, the Micex is trading for a song. The Micex trades at an incredible average of 8 times earnings! To put that in perspective, right now the MSCI Emerging Market Index’s is trading at 18 times earnings, China is at 32 times earnings, Brazil stands 24 times earnings or even India is at 18 times earnings.

Traders – particularly day traders – are coming out the woodwork to take advantage of these “deep values.” (Or at least, what they perceive to be “deep values.”) Those day traders are creating some very interesting opportunities in the Forex market at the same time. Let me explain…

Cheap Russian Stocks = MASSIVE Currency Opportunity

The retail trading volume on the Micex has surged six fold this year. In fact, the number of Russian individual trading accounts has grown to over 630,000 as of July. These accounts generate about $1.3 billion in average daily volume, up from $220 million as recent as January.

This “added” volume is attracting traders from big institutions all over the place. Most recently big-time traders from BlackRock and Templeton have been checking out Russian stocks. Why? If you’re a big fish in the sea like these guys are, you need a ton of volume in your chosen market so you can move in and out of stocks without significantly moving the market yourself.

You or I don’t have to worry about this but an institutional money manager that moves in and out of millions of shares has to consider this a lot. It limits where they can effectively invest (which is one of the reasons why they like the currency market so much).

You see, just in ONE emerging market BlackRock fund, they’re moving $1.4 TRILLION around.

In addition to the volume, the huge volatility has investors salivating too. Russia’s Micex has surged 79% this year, which is the steepest gain of any of the indexes that track the world’s 30 biggest markets.

Russian Stock Volatility Ensures Ruble Strength
as Long as the Mania Lasts!

So needless to say, all of this focus and attention on Russian’s stocks is also pushing its ruble around too.

The dollar has been dropping broadly against most currencies since March. Likewise, the dollar has been falling vs. the ruble as well. However, not only have excesses been wrung out of the USD/RUB uptrend but as recent as May, the ruble has pushed the USD/RUB into a downtrend. That’s great news for the ruble going forward. Check it out below.

Trade the Russian Stock Market Mania through the Ruble as a “Safer Play”!

So currency traders too are joining the party by pushing the ruble higher vs. the dollar while all of this “mania” exits.

As this Russian story spreads, even more foreigners and big-name traders will come to the party. That will only cause the ruble to gain further as these foreign traders have to exchange their foreign currencies in for rubles to trade stocks denominated in rubles.

Expect the ruble to continue to gain strength – particularly as key markets around the world continue to recover, global GDP numbers start to expand once again and as energy resources like oil are used to grow these recovering economies once again.

Happy Trading,
Sean Hyman

Your Trader “Training Wheels”

My #1 Forex-Trading Trick

My students are always after me to teach them how to use key technical indicators.

I usually tell them the same thing: Learning how to use them is just the first step. Learning when to use them…that’s the real trick.

After all, it’s one thing to know what a hammer or screwdriver does and it’s another to know the best time to use each one to get the optimal results.

In a similar fashion, traders learn how to use technical tools. But that doesn’t mean they know how to put all of the pieces together so they know when to pick and choose the best technical tool to evaluate a specific currency pair.

There is one simple tool I wish I had known from the beginning. ALWAYS follow this rule and you will stay “light years” ahead of many other traders out there…

1. The trend’s direction is THE most important indicator out there.

Sounds simple right? Well, it is. But many traders often lose sight of this very simple rule and try to trade against trends. That’s when you get in trouble.

So let’s talk about how to find the trends…

Here’s the easiest way in the world to determine a trend. I call it “trend trading with training wheels.” You can follow the trend just by tracking what’s known as the “simple moving average.”

This is an indicator that you can actually put on your price chart and it will “point the way” to the trend’s direction. It does this by smoothing out the jagged price action and showing you the overall trend where the pair is headed.

One of the more commonly used ones is the 50 day simple moving average (SMA). It can be found on any Forex charting package. Once you pull up the indicator on your charts, all you will have to fill in is the number of periods, which is “50.”

This will show the medium-term trend direction for a currency pair. Let’s take a look below to see what this looks like….

Finding the Trend: Not as Difficult As It Sounds…

So the trend direction is the most important thing to determine. If you never learn nothing else about technicals, learn that.

Because if you will trade in the direction of the trend with good risk management (not risking more than 5% of your account if stopped out in the trade), then you have a huge portion of Forex trading “licked” right there.

I’ll be back tomorrow with my second tool that I use to evaluate technicals. Till then…

Happy Trading!
Sean Hyman, Professor FX

Your Stock Buddies Won’t Believe This…

Years ago, before I was a Forex trader, I did the usual trader stint in the stock market. I watched P/E ratios, tracked company performance and tried to analyze which company might rise next.

Of course, it was my job at the time and I did alright with my trades. But the truth is my portfolio would have performed so much better had I known what I know now. I’ll get to that in a second.

First let’s talk about the transition.

It was a difficult time for me. Mostly I had to change my thinking and how I evaluated trades when I came over from the stock world. I had to stop thinking like a stock trader to start thinking like a currency trader.

In doing so, I learned a few tricks that can not only boost your Forex trades…but can also help you boost your returns on any stock trades you place from now on.

What Separates Currencies from Stocks in Trading
(Beyond the Obvious)

There’s one fundamental truth you need to learn when you’re making the shift from stocks to currencies…

Stocks are relatively micro and currencies are relatively macro.

By that I mean that when you study stocks, you are mainly analyzing industries and individual stocks mainly. In currencies you are analyzing the health of whole economies.

For instance, you usually analyze stocks by choosing a specific group of companies or particular industry of an economy. Then you look to see which sector or industry is performing overall (ex., Healthcare sector, technology sector, energy sector, etc.).

Once you find a leading group or industry, then you’ll usually drill down from there. You’ll start examining a handful of companies within that group or sector to see which are the most fundamentally sound and thus, most likely to be some of the “top performers” out of the group.

You would do this by looking at a company’s earnings, dividend history, etc. You buy the stocks that have a steady (and above average) growing stream of earnings and dividends. On the flipside, you avoid (or sell-short) the companies that have choppy earnings or that didn’t earn money at all yet.

Well, in currencies, you’re looking at not one specific company, but an entire country. Ergo, you have to start with the macro picture and drill down from there.

I like that because you don’t have to worry about 1 CEO or 1 CFO screwing up your overall investment trend. An economy does well because the companies within it as a whole, do well. So it’s like being able to invest in that economy broadly and with less overall risk than an individual stock.

If You Know Nothing Else About Currencies, Learn This…

In currency land, what matters most is if there’s enough inflation (CPI – Consumer Price Index) in the country to cause central bankers to hike interest rates. Currency traders drool over hiked interest rates because they can earn more money on their currency trades than if they were buying a “low yielding” country’s currency.

So inflation and interest rates are the top two things to look at. A third important factor is the economy’s overall growth, which can be found in their GDP (Gross Domestic Product) numbers.

Introducing the Holy Grail of Forex Sites

You can go to one simple site to find that information on any of the major currencies out there: www.tradingeconomics.com .

That FREE site will rank the countries that have the higher inflation, higher interest rates, higher GDP growth, etc.

This way, within seconds you can get an idea of which countries are the strongest from a “currency perspective” and which are the weaker ones.

Then, once you know this, you will improve your currency returns. As an added bonus, when you’re doing your currency research to see which countries are “better off” than others from a fundamental stand point, you’ll also know which countries you might want to “shop for stocks” in.

Frankly, I wish I had known that when I had been buying stocks – my trades would have been that much stronger from a fundamental perspective.

Keep in mind that you can also look for ETFs that will hold a “basket of stocks” from a certain country too. That may be the best way for the newer investor to get their feet wet.

This way, your currency research not only benefits your currency investments but it also helps your stock investments.

Hot Stock Tips from the Currency Trader

After all, if you’re buying stocks in the strongest economy in the world at the time…you automatically stand a better shot of your investment earning profits. In fact, you’re really making an overall investment in the health of the larger economy that the company resides in.

While I always try to pick superior stocks, I also realize that even a mediocre stock in a great economy will many times do better than a great stock in a horrible economy.

Happy Trading!
Sean Hyman, aka Professor FX

P.S. Stocks aside, if you’re a seasoned trader you can use all these tricks to boost your trading. That’s what my buddy Ashish does every single week for his Exotic FX Alert subscribers. He starts with the macro ideas about each individual emerging market economy and then uses technical analysis to drill down the best exotic currency trades in the world. Click here to learn how to copy his best moves in Forex.

Forget “Death By Stereotype”

By Ashish Advani

If you’ve tuned in to pretty much any of the news organizations lately, you’ve heard about how we’re recovering in the United States.

You’ve heard about green shoots. You’ve seen all the newly promising data. You’ve heard a President, Fed Chief and Treasury Secretary trying to convince you about how sturdy the financial ground is.

Indeed, it seems that the world is buying this growth story here in the United States. Right or wrong, that’s what matters at present.

You see, sentiment is a huge driver in the currency markets. How people “feel” about the market actually influences currencies. So, if enough people believe a trend will happen, it tends to happen – at least for a while.

So let’s begin by saying: I’m definitely not fighting the trend here. I’m riding the growth story while it lasts here in the United States.

But I’m keeping my trades on a VERY short leash. I’m also clearing a pathway to the exits just in case reality hits home anytime soon.

The “W” Recovery: Why Reality Hasn’t Sunk In Yet

If I was a speculator, I would be betting on a “W” recovery for the U.S. with a second leg down coming soon. And I tie that to the continuing as well as upcoming crisis in the housing markets.

By the way, my colleague Sean yesterday gave you three currencies to buy for the long-term. I agree with his choices, but like him, I also think there are going to be pullbacks and reversals in the short-term. The next BIG reversal is exactly what I’m talking about here.

Why do I say a reversal is coming? Let’s start with the not so positive data for a moment.

If you believe that we have seen the worst in the housing sector, think again. Remember those pesky adjustable rate mortgages (ARM)? Well, the largest majority of them are up for resets in 2011. Till we are past that hump, no meaningful recovery should be expected. And if we see one, like now, it will most likely not last.

Where I’d Put My Money Instead…

So let’s set the U.S. aside for a moment.

On the other side of the pond, in India the meaningful recovery story just continues to grow. As I have written earlier, the Indian growth story has been tainted by its dominance in the IT and Outsourcing sectors.

Lots of traders have trouble accepting any recovery anywhere else if the U.S. is still suffering. Indeed, many seem to have the “Death by Stereotype” idea. They’re skeptical of any growth story in emerging markets like India because they don’t believe India can grow without the U.S. recovering first.

Let put that idea to rest right now. The internal consumption story in India is well documented. In fact, it’s been India’s saving grace in this global downturn. It has helped India keep its head above the rest of the world as far as growth is concerned, albeit at a lower rate.

Need proof? Just check out some of the data coming out of India…

• The Industrial Production Index (IPI) blasted past what economists expected and grew 7.8% year-over-year in June.
• June IPI growth was the highest since February 2008.
• There were huge increases in the Capital Goods Index (CGI).
• On a yearly basis, the CGI grew by 11.8% year-over-year after three months of contraction.
• Yearly growth in the production of consumer goods was strong at 4% year-over-year with a 15.5% year-over-year increase in consumer durables.

Rain or Shine, This Nation Will Rise

As I have mentioned earlier, India is still heavily dependent on the monsoon (rainy season) for Agriculture, which is an important part of the GDP. And so far, the monsoons have been below average.

However, it seems like the uptick in the industrial activity will likely mitigate the negative impact of poor rains. Several indicators of consumption and investment demand such as the Purchasing Manager’s Index (PMI) and motor vehicle sales have been showing significant upticks for several months now.

No Longer Necessary in India…

All of this economic data in the past few weeks have made me more bullish on India. I am beginning to sense that India’s GDP growth in the next few quarters will blow past the world’s estimate of 6.6% growth for FY 2010.

While this may lag its main rival China’s 8%, I expect Indian GDP growth to come in around 7.5%. Not too shabby! That’s my prediction based on the improved investment outlook in infrastructure and capital goods. Both of these are indicators of laying foundations for an extended and long-term growth story from India.

I also expect tightening interest rates to help slow down the economy and avoid bubble like growth situations.

Unlike the Federal Reserve, which has pledged low interest rates for ‘extended’ periods of time, the Indian Reserve Bank is already signaling that the low interest rate days may be over soon. We may see as much as 200-300 basis points increase in Indian core interest rates in the coming six months. And this will be tremendously positive for the Indian Rupee.

Bottom line: As I have been saying for a long time, stay long India (and especially the Indian rupee)!

Yours in FX Profits,
Ashish Advani

3 Currencies Selling at a 17% Discount

Today I want shed some light on the commodity currencies and the impressive rally we’ve seen lately…

As you probably know commodity currencies started rallying hard this past March (along with just about every other asset under the sun).

But in just the past few days, we’ve started to see a reversal. As of this morning, the Aussie dollar was around 81 cents. The Canadian dollar was at 90 cents. Even the Brazilian real gave back some of its impressive gains.

Now of course, there are several valid short-term reasons for why commodities should be pulling back. You can point to steel developments in China (see Chuck Butler’s comment below for more)…or the strong dollar stunting our commodity exports…or weak consumer confidence slamming stocks and commodities.

But notice: I said “short-term.” In other words, this is just a blip folks.

In the longer-term, I see this commodity currency rally lasting for at least the third quarter. I’ll explain why in just a moment.

First let’s take a look at how high the commodity currencies have soared in just the last few months. Check out the chart below.

As the Dollar Fell, Key Currencies Have Climbed

As you can see above, commodity currencies have been on an almost a straight shot upward trend for months…and I see that continuing.

Now of course, reversals will come in the short-term. In fact, my colleague Ashish is using this pullback to help his Global Currency Options subscribers make a tidy profit.

But in the long-term, the fundamental forces driving this commodity currency rally have NOT ended yet. Therefore, I’d say hold onto your long-term commodity currency plays.

Not to mention, uptrends like this don’t quickly change. Economies just don’t turnaround on a dime like speedboats. They’re more like huge cruise ships that turnaround extremely slowly. That’s why it’s always better to take the cruise and follow the trend rather than to get out too early.

All Three Currencies Are Still 17% Off Their Highs

Let me put this into perspective. Yes, these currencies have run up a lot but let’s look at it another way. How far off are they from where they peaked last? Are they anywhere close to those levels yet? Heck no!

In fact, I ran the numbers last week – before the recent pullback – and Australia was still 17.8% (unleveraged appreciation) off its pre-credit crisis peak! Brazil still has 17.4% before it reaches its former peak and Canada has 16.8% before it reaches its old peak!

Again, that was BEFORE commodities started pulling back in the last couple of days. That means these currencies are even cheaper now, especially if you’re a long-term buyer and you like to buy currencies for months on end or even years.

Trend Traders Eat Top & Bottom Pickers for Lunch

Here’s the truth: You have to be a REALLY great, usually professional, trader to pick tops and bottoms in the market. Most retail traders just don’t have the time or experience to time the markets correctly. This is why “top and bottom pickers” don’t last for the long haul and trend traders do in the retail market.

Trends last much longer than you (or even I) think. However, you should still trade in the direction that they are going….until they stop going in that direction.

If you think about it, there’s only one “true” turning point in a trend but plenty of places for traders to get “faked out” by thinking that “this is the one” all along the way. So you can “top pick” your account all the way to a zero balance OR you can hop on trends that could still advance another 17% overall. And there’s nothing that says that they couldn’t do more .

This is why I say trend traders eat top and bottom pickers for lunch. When you’re trying to pick a top and get stopped out, you have to reverse your position. In other words, you’re helping the trend traders who are playing the other side. That means you’re actually helping fuel the trend.

The moral of the story? Trade the trend until it ends…

Happy Trading!
Sean Hyman, Professor FX

P.S. Just to be clear: Yes, reversals happen even in a long-term trend like this. The right trader can take advantage of those short-term reversals as my friend Ashish is doing right now. (You can get details on his strategy here.) But if you’re a buy-and-hold type investor, I suggest holding on to your long-term Brazilian real, Canadian dollar and Aussie dollar bullish plays for now. They will pay off in the months and years to come.

The Latest in Swiss Intervention

As you may know, I’ve been following the Swiss central bank intervention story for the past couple of months now. In fact, I predicted the first intervention. (You can read the full story on that here.)

This is huge folks. The Swiss National Bank hasn’t intervened like since 1992. The Swiss central bankers are jumping in the markets because they’re concerned about one currency pair…

Coincidentally, it’s the cross-rate pair I’ve been watching like a hawk: the euro/Swiss franc or EUR/CHF.

Oh sure, the central bank is concerned about other exchange rates too. But this one is the one that really makes or breaks their exporters.

As I explained in June, the bulk of Switzerland’s exports go out to the rest of Europe (even more so than to the U.S). So if the Swiss franc suddenly becomes expensive in euro terms, that can seriously hurt Switzerland’s manufacturing sector.

Focused on “Selling Francs & Buying Euros”

The Swiss National Bank hasn’t been exactly quiet about their intervention plans.

In fact, you can go right to the Swiss central bank’s website and find out that the bank has been both selling Swiss francs and buying euros.

According to the Swiss central bank’s website, they’ve bought about $6 billion U.S. dollars and only about $40 million British pounds. But the Swiss National Bank has bought a whopping 11 billion euros! So we can clearly see where the focus is (when they’ve bought about twice as much in euros as dollars).

Swiss Central Bankers Care More About the Euro than the Dollar

Some ask, “Could this government manipulation” ultimately hurt the Swiss franc?” My response? Absolutely not.

Here’s why… When Switzerland’s currency drops in value and the Swiss central bankers force an uptrend in the EUR/CHF (as they’ve been trying to do), then the Swiss manufacturers can sell more exports to the rest of Europe and the Swiss economy flourishes.

The Swiss National Bank has intervened in the currency markets before to help the local economy. The only difference is before they were doing the exact opposite. The Swiss National Bank was selling Swiss francs and buying euros while the EUR/CHF pair was still in a downtrend.

However, once this cross-rate (read: “non-dollar currency pair”) pushed its way into an uptrend, the Swiss central bankers started closely watching this pair’s price.

As a currency trader, I started watching this pair too. You can see the uptrend on the chart below…

The Swiss Franc Makes a Break for It…

The Trend is Finally the Central Bank’s Friend!

Many times when central banks are intervening, they have a tough time beating the trend that they are trying to correct.

We constantly see this in Japanese yen’s price when the Japanese central bank intervenes. They usually lose in the short term because they can’t seem to break the downtrend in the USD/JPY as the dollar falls against the stronger Japanese yen.

However, in the end, the Bank of Japan eventually wins and pushes the USD/JPY price back up…but not until months pass minimally.

Well, we’re finally at that point with EUR/CHF. In fact, I was the first one to bring it to you when the downtrend actually broke on EUR/CHF.

You see, any technical Forex trader could have called this coming uptrend. It passes any “technical metric” that you want to throw at it.

This pair is trading above its blue 50-day SMA (simple moving average) line on its daily chart. It’s above its purple 200-day SMA line. It’s also above its red downtrend line too. So any way you slice it…it’s in an uptrend.

The Ultimate Swiss Weapon in Fighting Deflation: EUR/CHF

This uptrend in EUR/CHF will do more than just improve Swiss exports.

A strong euro and weak franc will also help to finally pull Switzerland out of its deflationary CPI numbers in time. Right now the Consumer Price Index on a year over year basis is at -1.2%.

So that means that they still have deflation that must break into a positive number before inflation will creep back into the economy.

In other words, the Swiss National Bank is trying to slay the beast of deflation and so far it’s working.

Now that the trend for the EUR/CHF is on the way up, they’ll have hedge funds, pension funds and big banks come in and help them. In other words, the big money is about to start buying the EUR/CHF pair as their “trend following” systems notice this newly formed uptrend. This will help the central bank in the long run.

So they are probably “out of the woods” and so is EUR/CHF. Therefore, you should be a “buyer” of the pair if you want to take the higher probability trade.

Happy Trading!
Sean Hyman, Professor FX

P.S. If you listened when I first warned you of an intervention here in FX University you could have grabbed a quick 300-pip profit. This is exactly the type of quick profit opportunities that we unveil to our Money Traders every single week in our Money Trader alerts. Learn more about how we pick our winners here.

Where You’ll Find the Next Gold Bull Market

I’m in Copenhagen this morning…an absolutely beautiful city. I’ve been coming here since 1996 when I opened my first private baking relationship with The Bank of Copenhagen – later sold by its parent, Swedish furniture giant, Ikea.

This morning, I sold some U.S. dollars for Danish krone. As usual when traveling abroad, I received a pittance for my dollars in exchange. No surprise on that score…

My long-term readers know that I’ve got zero confidence in paper money over the long-haul. (In the short-term, sure, I buy currency plays like anyone else, but I’m talking long-term for the next few decades.)

But longer term, I believe we’ll continue to lose the dollar’s purchasing power vis-à-vis stronger currencies but especially against gold. The sad truth is that most people have no idea about this reality and continue to see their purchasing power eroded by inflation and devaluation.

I’ve been a gold bull for years and recently turned even more bullish on the gold stocks. I think we’re at the cusp of the next phase in this rally.

Gold stocks have surged more than 120% since hitting a multi-year low on the XAU Index on October 27 at 65.72. We’re long overdue for the next push to $1,000 and beyond – and this time gold will stay in the four-digit zone.

Gold Is Set to Outperform the S&P 500 Once Again…

The XAU Gold & Silver Index has two periods of seasonal strength starting from July 27 to September 25 and again from mid-November to early February.

Since July 27 the XAU Gold Index has declined 2.8%. Yet the trade has been profitable in 16 of the past 24 periods and has outperformed the S&P 500 Index by an average of 8.4% over this period.

But even more compelling is the seasonal advance that occurs starting in November.

From mid-November to the first week of February gold stocks have showed profitability in eight of the past 10 periods for an average gain of 13.9%.

But even more impressive is our special X5 ratio, created by The Sovereign Society research team.

Any time the X5 ratio trades at 5 or higher, gold stocks have thereafter earned big triple-digit gains. And the index sits at 6.55 right now.

The Dollar Continues to Sail Lower…

How the Dollar Plays into This Gold Rally

Finally, the U.S. dollar is an important part of this equation since gold usually, but not always, provides an inverse relationship to the world’s reserve currency. Gold prices and the dollar both gained in 2005.

The dollar might be oversold near term and might even muster a rally. But, as we progress into fall and into 2010, the United States will grow desperate to grow inflation. Rising prices are in short supply in 2009 amid deflation in household assets since late 2007, wage growth and real estate. A weak dollar would stimulate inflation.

I believe the authorities will quietly welcome a weak currency.

On the interest rate front, the Fed won’t be raising interest rates until 2011 at the earliest. The country is in such a mess right now that any preemptive strike against inflation would be utterly idiotic. Interest rates will stay low for a long time.

There’s a reason why rates are at or near zero percent. There’s barely any demand for credit.

Gold stocks will probably trounce most risk-based assets over the next 12 months as gold finally blasts through the $1,000 an ounce barrier and stays there. It’s time to buy gold stocks.

Best Regards,
Eric Roseman, Investment Director
The Sovereign Society

P.S. The Sovereign Society’s latest special report gives you the full insights on the next bull market in gold stocks. Get your FREE copy here.

$1,300 Gold Is Coming

By Sean Hyman

As I often say, it’s always good for currency traders to watch where money is flowing around the world. If you know where investment money is flowing, you know which currency is about to get a windfall.

The same can be said about gold.

Only when you’re talking about gold holdings, it’s better to look at who’s buying and selling their gold. Just look at the IMF…

Earlier this year, I told you of the IMF’s plans to sell about 403.3 tons of gold. The G-20 officially approved the sale this past April.

The IMF claims they’re selling gold to help “the world’s poorest countries.” Indeed, it is possible that some of those funds will go there. However, the #1 reason why they’re selling is because they need to raise some cash to meet their own budget deficit!

You see, the IMF owns a ton of gold…but it’s not like gold earns interest or produces dividends. Therefore, they are “gold rich” and “cash poor.” So every so often, the IMF must sell some gold to pay their bills.

I bring up this point because I want to ensure you that they aren’t selling gold because they believe it to be overvalued. On the contrary, they’re selling gold because it’s their most valuable asset.

It’s similar to how the largest investment banks and hedge funds sold off their gold holdings to try to balance their books in 2008. (In fact, that’s one of the main reasons why gold prices were relatively flat last year.)

But you know already know that gold is a valuable asset. Recently, several central bankers have shown they agree…

Forget the IMF. Look Who’s Buying Gold…

This year, China has continued to boost its gold reserves. In fact, their gold reserves have mushroomed a full 76% since 2003.

China’s latest gold purchase was no small sum either. The Chinese added 454 tons to their reserves. That alone is more than the IMF is selling. It also brought the Chinese gold reserves to 1,054 tons. That just edges out Switzerland’s holdings of 1,040 tons.

It’s no surprise to me that China is doing this. Their foreign exchange reserves have blossomed six-fold in six years. They have $2 trillion in reserves to spend. The Chinese recognize that long-term the dollar is in trouble so they are buying “undervalued commodities” as they put it.

So far, it’s paid off well for them. As you know, the dollar has been on a downward slant since March. As the Chinese load up on more undervalued commodities like gold, it helps to buffer their reserves from any depreciation in the dollar.

You can be sure they’ll be buying more too. They’ve got a $200 billion sovereign wealth fund just to invest in things like these undervalued commodities.

So in my mind, when it comes to gold reserves…China is probably the most important one to watch. It’s not that they hold the most, but in my opinion, they have the biggest ability to buy the most if they choose to do so.

Also, remember that China is now the world’s biggest gold producer, surpassing South Africa and Australia! Therefore, keep your eyes on China when it comes to gold.

So here are the world’s top holders of gold reserves. The U.S. takes the top spot by far, at a whopping 8,134 tons. (By the way, the U.S. NEVER sells its gold…which is interesting.) Germany is a distant 2nd place at 3,413 tons. The IMF has 3,217 tons. France has 2,487 tons and Italy has 2,452 tons.

But it’s not just China that’s gobbling up the gold!

But there are others that are ratcheting up their gold reserves for fear of dollar weakness coming.

For instance, Venezuela’s government has mandated that any gold they produce must be offered to their central bank FIRST. They’ll only sell to everyone else after the central bank takes in what they want.

So their government mandated that 70% of their gold must be sold locally and 60% of that 70% must first be offered up to their central bank. Then the other 30% can be exported.

This is a huge change in their government’s policies. The government used to say only 20% had to be offered to their central bank. Huge difference between 20% and 60% huh? I think it’s safe to say their stance on gold buying has changed dramatically.

Russia said it recently “increased its international currency and gold reserves to $391.3 billion from $385.9 billion.”

So why are all of these central banks “scampering” for more gold? Because they all have two commonly held beliefs, in my opinion: 1) They fear a further drop in the U.S. dollar is coming (which I agree). 2) They believe that gold is undervalued (which I also agree with).

Gold in “2009 dollars” Could Climb Well Above $2,200!

See the inflation-adjusted gold chart below. You see, when investors look at the historic highs for gold, they don’t always figure in inflation. For instance, 1980’s highs for gold are thought of in “1980’s dollars.”

However, even just adjusting for inflation through 2007, will show you the actual high for gold in 1980 was closer to $2,145. There are some that argue that in “2009 dollars” the number is well above $2,200. You can see this all on the chart below…

Yet right now, gold is comfortably consolidating in the mid $900 range. Therefore, I think in the near term (coming months), you will see gold hit $1,300 but ultimately, it could easily go up to $2,500 in my opinion.

So in short, I agree with the central bankers. Gold is still grossly undervalued. Watch for gold to soar later this year…

Happy Trading!
Sean Hyman, Professor FX

P.S. My colleagues and I recommend holding 5% to 10% of your portfolio in gold. Recently, our friends at The Sovereign Society have discovered a key technical indicator that allows you to predict the next upsweep in gold stocks. You can read all about it in the latest FREE Sovereign Society special report here.

FX 101: The Most Fool-Proof Charting Trick in Forex

By Sean Hyman

Plenty of first-time Forex traders are turned off by currency charts.

But the truth is, charting techniques don’t have to be impossible. You don’t have to use retracement levels, Fibonacci, or Elliot Wave Theory if you don’t want to.

In fact, one of my favorite charting techniques is also one of the simplest…and it can help you spot long-term trends coming in the Forex market….

It’s called the 200-Simple Moving Average.

The 200 SMA is one of the most widely used indicators in the world. I even catch purely fundamental traders using the SMA in their charts. Why? Because everyone needs to know where long-term trends are heading, even pure fundamentalists.

Let’s talk about how you use it. First, you should pull up a daily chart that goes back in time at least a year (or even longer is better).

Then place a 200-Simple Moving Average (SMA) on the chart. On the chart below, the grey line is the Simple-Moving Average (the one with the arrows). The SMA can be found under the “Studies” or Indicators” section of most any charting package.

Your Key to Spotting Long-Term Trends…

Above, I’ve charted the EUR/USD pair on the daily chart that goes all the way back to mid-2006. That’s a HUGE chunk of time when we’re talking about currencies.

Towards the left side of the chart, you can see that the “average” price moves upward over time. So while the price may be jagged and spiky at times, the moving average smoothes this all out so that we can tell if the currency pair is headed up or down overall.

To the left of the chart, you can see that the price continues to climb higher. This tells you that the EUR/USD was in an uptrend at that point. In other words, the euro moved higher vs. the dollar overall.

However, on the latter part of the chart (right side), the trend turns downward and you can see the euro fell vs. the dollar overall.

You want to define the trend’s direction and trade with it because that’s where the higher probability trades lie. Low probability trades would be shorting an uptrend or buying a pair in a downtrend.

You will notice that the price tends to trade at or above the 200 SMA in an uptrend and in a downtrend the price dips below the 200 SMA and holds at or below it.

Bottom line: You always want to trade with the overall trend. Use the Simple Moving average to figure out if your pairs are heading up and down, and then always trade with trend.

Happy Trading!
Sean Hyman, Professor FX

P.S. This is the kind of technical analysis my colleague, Ashish Advani constantly does for his exotic currency traders. It’s the very reason he just grabbed a 260% profit on the Polish zloty – just this week. Could his strategy work for you? Click here to find out.