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A friend of mine asked me a question about investing. Here’s my answer.
Hey buddy,
You were asking me about “Your rate of return of investment in the foreign currency trade” and “How should I start?”
I’ll tell you what I think about investing in today’s market, and you can do what you want about it. Right now we’re at the edge of a cliff. There are derivatives totaling hundreds of trillions of dollars. They seem to be a form of insurance against market volatility. One party lowers their risk in exchange for the potential of higher returns. I don’t really know enough to say. But I do know that it’s going to have a domino effect. Some corporations buy one derivative and sell another to offset that risk. Bankruptcies mean that the risk they thought they had insurance for is still there - and when they find out they’re not insured after all, they’ll go into bankruptcy too.
Plus we have many other problems like the housing market meltdown, the national debt, the national deficit, the possibility that countries that have huge foreign exchange reserves in dollars may try to cash it in. If this doesn’t lead to an outright crash in the market, it will lead to hyperinflation as the central banks try to flood the markets with more money (credit) so that the economy can spend its way out of the problem.
So the bottom line is, there’s a very big chance that the markets will crash. Not just the US markets, but global markets. There was a meltdown in 1997 that started in Thailand (see http://en.wikipedia.org/wiki/Asian_financial_crisis). This could be bigger. It’s all a house of cards, which means that no market is safe. I do like the Japanese yen, because the yen carry trade (see http://en.wikipedia.org/wiki/Carry_(investment) ) is going to have to unwind, but their stocks are as vulnerable as any other stocks.
Traditionally, stocks that make basic goods like soap, toilet paper and cigarettes do well during recessions and financial trouble. But even these stocks will crash in sympathy with the market - so I don’t think it’s a good time to buy them. After the crash, maybe.
As far as I can tell, only things with real value like commodities (wheat, corn, copper, etc.) have any chance of keeping their value in a market crash. Even then there may be reduced demand. For example, the demand for copper is fueled by many different areas, including increased infrastructure (wiring) in China and India. In case of a crash, there will be less development, fewer products produced and therefore less demand. The same holds for oil and most metals - gold and maybe silver being the exception. We’ll always need food, so wheat and corn should hold their value, but I don’t know how to invest in them.
So that leaves gold and silver. Gold in particular will see a lot of action when everything else goes to hell. It’s a safe haven. Remember, unlike a stock, gold can NEVER go to zero. It’s always going to be worth something. I’d only worry about it going down when everyone is investing in it. When there are no more buyers, that’s when everyone will head to the exit.
A lot of advisors say to be in US treasuries, or money market funds. The problem is money market funds are no longer safe - they’re based on short term loans to companies that may be suddenly forced into bankruptcy. Treasuries can be hit hard if people lose faith in the dollar.
I didn’t do any forex trades. I just converted all my money into the loonie (CAD/Canadian dollar) and bought mining stocks with it (and an oil service company). I used Interactive Brokers because they were able to trade on the Canadian exchanges without charging a lot of money. I did this in February/March of this year, and haven’t bothered calculating the return. I do know that since the beginning of the year the CAD has gone up 36% against the USD. I don’t know how much of that gain I got.
Canada’s major exports are natural resources. Given that natural resources have been increasing a lot, it’s only natural that the CAD would go up in value. Australia’s dollar has done the same thing -but not as much. Even though I was expecting it to happen, I got lucky. I didn’t expect that much of a gain. I thought it would be around 15%.
My investments are in small mining stocks, most of which have past drill results. At the end of the last mining boom, there was a company called Bre-X that falsified their drill results and fooled everyone into thinking they had one of the largest gold deposits ever. As a result of the scandal, Canadian companies are now required to have drill results that are 43-101 compliant. There were a lot of drill results from the tail end of the last mining boom. The companies that own the claims are merely drilling holes next to the original holes to show they have the resources they already know they have. So it’s not uncommon for them to suddenly triple in value as the drill results come in - exactly as the company knew they would. Then even then they can drill even more holes to find the outside edges of the ore body - which can drastically increase their value still more, because the ore body is almost always bigger than the original discovery holes found.
But even this has problems. The explorers usually end up partnering with an established mining company to get the money to do a feasibility study, and later turn it into a working mine if the feasibility study shows that a mine would be profitable. Problem is, as part of getting the finances to set up the mine, the exploration company usually gets a loan from bankers. The loans usually have provisions that require the explorer to hedge against price fluctuations in gold. So if gold goes up, the exploration company may end up not getting ANY of that price increase.
So I’ll be selling companies or cashing them in as they’re taken over. Otherwise the price will suddenly crash as investors figure out that the explorers aren’t going to benefit from gold price increases. There may be a general crash in about 2 years as everyone figures this out. I do know that Jim Sinclair invests in companies that don’t mess up the loan they get from the bank.
It’s really dangerous out there. If I were you, I’d buy the GLD ETF (exchange traded fund) which is based on the price of gold. I’d also make sure my brokerage account was NOT connected in any way to a major bank. If the brokerage does anything other than trade stocks, your money may be tied up in bankruptcy courts. I’m also a little concerned about GLD actually having the gold in the vaults. Supposedly many governments have leased out their gold so they can make a little money from their gold, instead of having it just sit in a vault. But what happens when the gold isn’t returned due to bankruptcy? GLD could have the same problem.
It’s really, really dangerous right now. Almost no one realizes this. That’s why I’ve been telling you to get your money out of the pension. I doubt Lucent will be able to pay their pension obligations.
Burton