However, Europe moved into a recession before the U.S. as suggested by the sharp decline after its introduction. The slide experienced by this consolidate currency was significantly more than anyone expected...moving from a 12315 high to double bottom lows below 8400. This shocking 32% deterioration is exactly why so many investors have been intrigued by FOREX profit potentials. Admittedly, the drop in the NASDAQ surpassed the rise in U.S. Dollar parity. Still, people are more inclined to buy the dollar and/or sell the Euro than to short stocks and related equity indices.
With the U.S. poised to go to war and the lack of a vigorous recovery, the Dollar is on the defensive. Currently, the Euro has surpassed parity and it appears the July through September 1999 consolidation range is being challenged. A breakout above 11000 puts the cash Euro in a position to test former all-time highs. Of course, this is an extremely young currency. All-time highs are not particularly relevant from an historical perspective.
Coincidentally, my new book, Currency Trading: How to Access and Trade The World's Biggest Market (John Wiley & Sons) was released on January 17th. Of course, the book was written over the past eighteen months. Yet, my prediction for exactly the pattern we are currently experiencing is detailed in the pages. One of my prognostications deals with the parity theory that I have espoused in Special Reports. World economies may be heading for a 3-way currency standard involving the U.S. Dollar, Eurocurrency, and yen. If such a consolidation were to emerge, the eventual objective would be to control parity swings, possibly limiting them to a range around 1-to-1.
Of course, this would not represent an encouraging scenario for my book. Such a development would severely limit FOREX profit potentials and market diversification. The likelihood of a 3-way consolidation is, perhaps, remote. Global politics represent an enormous hurdle. Further, we must deal with the Chinese Yuan and Russian Ruble. Both of these "developing" currencies represent challenges to the currently established standards. I believe it is next to impossible for the Chinese to accept a Japanese currency as the Pacific Rim standard. Canada, Central America, and South America would benefit from a consolidation into a North American currency like the U.S. Dollar. It would probably be renamed the American Dollar to encompass all the Americas.
The formation of the Commonwealth of Independent States has diluted Russian pride in the ruble and fostered a more pragmatic view that entry into the European Common Market (ECM) represents a benefit. There would be issues with Australia, India, and African nations. There could be a fourth currency standard.
For the moment, we are focusing upon the here and now. Our long positions in the Euro and Swiss Franc are progressing nicely. We did not take the short side of the dollar because analysis indicated the yen component could dilute the profit potential if the dollar remained firm against Japan.
Notice that prices have stalled into a consolidation after exceeding 8450. If Japan is to recover, it cannot afford strong yen/dollar parity. If anything, the best trade would be Euro/yen because this provides a more direct incremental parity.
In contrast, look how the Swiss Franc has responded to the breakout above it's consolidation range established from July through December last year. There is no stall or hesitation.
The Swiss is still related to gold. One reason it has not joined the Euro is because gold is not considered a "reserve asset." Everything in the Swiss psyche is based upon a fundamental belief in gold. Thus, their franc benefits from gold appreciation.
The anti-gold activists argue that gold's appreciation is based upon the dollar's depreciation. However, local purchasing power parity has not been adversely affected by the dollar's parity decline...yet. Our inflation appears low. Further, gold has appreciated 40% while the Euro has only gained 32% as previously mentioned. This 8% difference is significant. Moreover, gold may not be finished making its upward trek.
Gold began its breakout well before the dollar began its decline. This anticipatory more was allegedly based upon sinking U.S. equity markets. If, indeed, the stock relationship took precedence over a declining dollar, the current combination of both should propel gold to further highs. Despite the assertion gold is overbought, it has been inching higher. A challenge of 37500 points to topping $400. At that stage, the public is will stand up and take notice.
There is a striking similarity between the gold chart and Swiss Franc. The same consolidation appears and we see a similar breakout. However, the lows were ascending. As mentioned last week, the latest upward channel looked like it would be violated. Today, the breakout came!
World oil prices are quoted in U.S. Dollars. Thus, appreciation in OPEC's energy assets has been more than offset in Dollar deterioration. This represents a paradox for OPEC and non-OPEC producers who have no protection against dollar slippage.
If the U.S. wages war in the Middle East, it would be a strategic time for OPEC to request pricing in Euros or a combination of Euros and dollars. While we view oil people as "sophisticated," OPEC and friends do very little hedging against the dollar when selling oil. There is a de facto 3-way arbitrage between oil, the dollar, and the Euro. Equally interesting is the potential for gold to enter the equation.
Some may recall when the Hunts "cornered" the silver market during 1979/80. It was at the height of global inflation fears and OPEC had previously suggested it would require a "basket of currencies" as the oil pricing mechanism. Behind the scenes, the U.S. pressured OPEC members to retain the status quo... particularly since so much of their assets were invested in the U.S. and there was no Euro to challenge the dollar's ultimate status.
The Hunts were seeking silver as the eventual monetary standard. The flaw in their approach was the weak relationship with OPEC members who were supposed to take up the silver cause. So the story goes...whether true or apocryphal. In reality, silver makes far more sense than gold because it is far more plentiful and bound to become more abundant as film-based imaging gives way to digital technology. Today's Wall Street Journal carried a front-page item warning of Kodak's poor performance. The article starts, "Eastman Kodak Co., tripped by falling film sales and a plunge in print-making..." Essentially, Kodak has lost its franchise as every camera manufacturer jumps on the digital bandwagon and quality finally surpasses basic film.
Notice how silver is struggling relative to gold. A good drop back to $4 would encourage a move to use silver for a monetary standard. Fifty cents would be even better!
In contrast, March crude oil has been receiving attention because there is an automatic assumption that our pending move against Iraq will shut down Middle East production. However, rumors that Venezuela is close to resolving its strike coupled with a pledge to increase production should war develop has culled bullish enthusiasts.
Like so many charts, March crude oil shows a "V" bottom correction. There was a downward flag within the rising channel that pointed to a breakout above 3500. The market finally overcame 3150 resistance, but formed a flag after testing 3400. Today's violation of 3250 sets up a renewed 3150 test which couldn't come at a better time for our heating oil strangle expiring Tuesday.
If February heating oil closes below 9000 today or tomorrow, I believe it will open lower next week...all things being equal with no weekend surprises. Even as we stand today, the position remains profitable on an expiration basis.
Over the next several weeks, we will see if gold makes progress while crude oil stalls. If so, the dollar paradox will justify new consideration among producers. In my intellectual exercises with several industry people, we all agreed that the oil paradox should become an issue moving forward. However, opinions were hotly divided on whether an Iraq war could become the catalyst for parting with the dollar.
There is little doubt that we will see increasing volatility in energy markets if the "inevitable" conflict erupts. Using the Gulf War as an example, I believe any upward burst in price is a profit-taking opportunity. I am inclined to sell calls against a rally as we did in 1991.
Investors who are hungry for the hefty returns of the 1990s are seriously flocking to commodity programs as indicated by the CFTC's concern over misrepresentations and Internet scams. Indeed, it is easy to show a novice a chart of gold, silver, crude oil, and the Euro and convince him or her to invest in "soaring" commodity prices.
Most of the scam artists prefer selling deep out of the money options for quick hits. However, there are some individuals that are recommending investment programs with little, if any, track record.
Having been published since 1956 and with a virtual lifetime in the commodity markets, even the Commodity Futures Forecast takes negative hits on a frequent basis. Overall, our profitable performance justifies our long record and devoted subscriber list. But, making predictions is difficult, at best. In more than 40 years, I have never seen the "perfect system." I have never met a fellow forecaster who makes infallible near-term or medium-term predictions.
I share enthusiasm for commodity trading with those who have recently ventured into these highly leverage financial vehicles. I believe we are, indeed, entering a new era of fantastic profit potentials. However, there is no fast and easy way to win. It always takes time!
January 24, 2003
Philip Gotthelf
Commodity Futures Forecast
P.O. Box 566, Closter, New Jersey
201-784-1235
www.commodex.com
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