All right, I have a question that I'd like to throw out for anybody who might be able to help me with regards to buying and holding foreign currencies.
Obviously, the U.S. dollar is being devalued over time. Pretty much anybody you speak to is aware of this, which worsens the problem even more, being that the USD is a "fiat" or floating currency based on the faith of the masses.
Well, if we all know that the dollar is going down in value on a longterm basis, and currently the Euro is going up, doesn't it make sense to buy and hold a foreign currency, such as the Euro, if you have lots of liquid cash that you'd like to keep in a bank account somewhere? Lots of offshore banks will allow their clients to switch currencies with a simple phone call.
So, what if you guess WRONG? What if you have $1 million EUR sitting in that bank, and suddenly the USD goes up in value against the EUR? You've potentially lost thousands of dollars in real value.
Therefore, this would lead someone to want to create some sort of a hedge so that they don't lose as much value, and might potentially even gain.
While in this pursuit, I have noted that different currencies have different amounts of correlation with each other. For example, the EUR and the swiss franc move almost exactly in tandem... so, if you're going to put half of your liquid cash in Euros and half in swiss francs, you'd be defeating the purpose.
Other currencies, such as the pound (GBP), do not have quite as much of a direct correlation with the Euro, but still have quite a bit (maybe 30% correlation or more?). So, if you were to hedge by buying some GBP or some EUR, you'd perhaps be somewhat ahead of the game, especially since both currencies are going up against the USD (longterm), and you could therefore turn your euros and pounds back into dollars, and have your money grow with respect to the dollar. You could even accentuate this further by putting a large chunck of your cash reserves into a FOREX account and be able to use a small amount of leverage if you wanted to.
Anyway, what I'm asking is if anybody has a knowlege of the correlations between the major currencies and which pairs are the best to use for hedging or equity growth potential against the dollar? Please note that my question isn't as simple as, "Should I buy and hold EUR?" I'm really asking what basket of currencies I should use to play against each other for the purpose of hedging.


Thanks!

--Ben

Van Tharp covers this topic in chapter 10 of Safe Strategies for Financial Freedom.

You can by foreign currency CD's through a U.S. firm such as:

everbank.com
iaac.com
pfswp.com

Steve

Hi Ben

Firstly, nothing is ever certain in the FX markets. It is possible that the next move in the US$ may be up.

The jury is still out on whether to trade Eur/$ or the CHF/$. I would suggest you pick one not both.

I would suggest that you focus on the major pairs such as
Eur or CHF /$, JPY/$ GBP/$, AUD/$.

As with any investment, don’t enter this market without an 'edge' such as a well planned and tested systematic approach!

Ben,

I don't have anything to add to what Andy and Steve said. But out of curiosity why would you rather own the currencies rather than gold?

Larry

Larry, Andy, and StevenEspi,

Steve said, “Van Tharp covers this topic in chapter 10 of Safe Strategies for Financial Freedom. You can by foreign currency CD's through a U.S. firm such as: everbank.com iaac.com pfswp.com”

Thank you, Steve, for the heads up about the chapter in Van Tharp’s book. However, I already know for a fact that buying foreign currency CD’s won’t provide nearly the kind of a safety or return that buying into a solid currency trend with slight leverage can… plus, I would have to relinquish both my control and my liquidity! Also, I want to keep a large part of my portfolio offshore for the purposes of asset protection, tax savings, and diversification.

Andy said, “Firstly, nothing is ever certain in the FX markets. It is possible that the next move in the US$ may be up. The jury is still out on whether to trade Eur/$ or the CHF/$. I would suggest you pick one not both. I would suggest that you focus on the major pairs such as
Eur or CHF /$, JPY/$ GBP/$, AUD/$.”

Andy, thanks for the suggestions. I am a very active FX trader and I’m well aware of these nuances. Buying both the EUR/USD and selling the USD/CHF would be somewhat pointless because they are almost a completely inverse pair! I may as well be completely in EUR or completely in CHF. They are way too closely linked. The EUR/USD and the GBP/USD are fairly good because they have a much lower correlation. I’ve played a lot with crosses of the USD/JPY and the GBP/USD, but they seem to be too closely correlated as well. Your statement about the lack of certainty in the FX markets is very true of all markets… no one has a crystal ball. However, in my long-term positions, I have done remarkably well by sticking with the long-term trends that exist in the market. I never try to predict. I merely react to what is going on.

Larry, you asked me why I would rather own currencies rather than gold. I suppose as far as hedging against the dollar is concerned, gold would be a hard one to beat! At the same time, however, I am concerned with the lack of liquidity of gold. Perhaps I’m unaware of a way to get spendable cash for gold in a timely manner? With cash in a bank that will immediately switch currencies or let me withdraw cash, it is hard to beat! I do see enormous value in owning both gold and currencies, though.

Thanks!

--Ben

ben,

you are an active currency trader AND an active real estate investor?

what do you do in your spare time, build rockets?



-ja

joeaaron,

I'm trying to make money to build rockets to shoot off from my real estate.

--Ben