Do gold linings exist in currency trading?

Gold Investment - 15 June 2010

One truth was validated time and again during recent volatile trading sessions: our global trading markets are highly interdependent in this era of globalization. The Internet, 24X7 news channels, and telecommunications technology have reduced the time it takes for news to circle the globe to nanoseconds. Since information is the path to wealth these days, our need to know is paramount, and our blood pressure readings highlight the stress it takes to be successful. Diversification into other markets might be a good thing. Can skills gleaned by years of trading in the precious metal and commodity markets be readily transferred to other areas of opportunity?

One would think on the surface that currency markets might be fertile ground to try similar trading strategies with a few minor adjustments here and there. Commodity prices are linked to a degree with the Euro and Dollar trading pair and its long-term forecast for 2010. The Dollar was supposed to continue upon its weakened course over the balance of the year as shown in the chart below from forecasts.org. However, the pronounced debt crisis facing the European Commission in Greece grabbed the spotlight recently. Trading ensued, the Dollar strengthened, Wheat futures fell in Chicago, but precious metals were bolstered by a flight of capital to safe havens. Linkage may mean familiarity, but not necessarily transferability.

   Click on image to enlarge.

The specific issue of “Value” should be addressed upfront. Currencies trade in pairs. You buy a position versus another currency. Your “value” is relative to the value of another country’s currency, which is based on a host of technical and fundamental factors, including interest rates and import/export trade balances. Silver, on the other hand, has intrinsic value on its own account. In addition to a variety of industrial uses, Silver has been used as a currency for thousands of years, well before the advent of paper-based money. Some investors would contend that Silver still is a currency of choice. Even with this distinction in value, a few investors have discovered creative ways to simulate a relative value equation for metals. By using leveraged commodity exchange-traded-funds, ETFs, one can actually trade and profit from the volatility observed in the ratio of Gold to Silver prices. This trading technique is unique, but for the moment, let us focus our discussion on the similarities between Silver charts and EUR/USD currency charts.

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