First Published in 1976
The leading economic nations of the world are caught between a rock and a hard place. The US Dollar is the reserve currency for the world. All nations hold US Dollars as a reserve and print their own money. In other words, other countries use the Dollar to back up their currencies. This is the way the world has carried out business for decades. But, other nations are increasingly realizing that the economic policies of the United States have no physical restraints. Other nations depend on the Dollar for safety; otherwise, the Dollar would have already collapsed. The St. Louis Fed wrote a paper in 2006 stating that America was bankrupt. At that time we had contractual debt obligations of $67 Trillion. That figure has ballooned over $40 Trillion in just over two years. As of this writing, best estimates are that we are in debt to the tune of $11.8 Trillion and have $107 Trillion in unfunded future obligations. The President and Congress are considering a second stimulus package and are trying desperately to pass a comprehensive healthcare program. Where is the money going to come from? Well, part of it will certainly come from increased taxes but with a very fragile economy I would expect little in the way of major tax increases near term. That leaves you with two choices. Either default on the long term contractual obligations of Social Security and Medicare or keep printing money and inflate your way out of debt. An aging electorate will not allow a default.
The nations that buy our treasuries, and without whom we could not pay our ever increasing national debt, have become increasingly weary. Earlier this year China warned the US that there would be consequences if America continued with its irresponsible physical policies. Two weeks later the US Congress passed a $787 Billion stimulus package. Kind of a slap in the face of our largest bond holder, wouldn't you say? When President Obama visited China earlier this year, he met with their highest level economic advisors and students. He was questioned about the safety of the huge number of Treasuries held by China. President Obama assured them that their investment was absolutely safe. His response was met with hoots of laughter! Apparently, the rest of the world sees something that our government doesn't. The continued printing of money to pay for our unfunded debt is causing inflation which could soon become hyper-inflation. This will destabilize not only the US economy but also economies the world over. While it is not in their best interest to dump the US Dollar, our trading partners are shedding the currency as quickly and as quietly as possible. This, of course, is continuing to drive up the cost of gold. Confidence in the Dollar is plummeting as the government will have to print huge sums of money to support their programs. In my May 2009 market letter I wrote:
I have held GOLD for some time but it is a tough commodity to trade. It often takes large moves for little economic reason. BUT, things have changed and I believe that everyone MUST begin establishing a position. I was hesitant about recommending gold because with the poor economic condition of the country, it seems that it was more likely that we would experience deflation or falling prices before inflation set in. That is really not happening. While housing and auto prices continue to fall, the commodity prices including food, construction materials and energies have begun to rise. The big factor that could change things drastically over the near term is the fact that the world is awash in Dollars and the Dollar is losing confidence as the safe haven for investors. It is being replaced by gold.
Although Gold has made a substantial up move to all time record highs, little has changed in the last 5 months. The only part of the economy that I see improving substantially is the stock market. I believe that is because the world is using our cheap Dollars to buy America. Unemployment continues to rise, home sales remain stagnant and home prices are continuing to fall.
The question is: What do we do about it? How do we protect ourselves and how do we make money now? I believe that if you have not moved at least 20% of your investment capital into gold you should do so immediately. Buy near term gold futures. I would buy a futures contract(s) in Gold for December delivery on the COMEX Exchange. The margin requirement for the contract is $5400. I would take delivery of the gold when the contract expires in December. You will then have 100 ounces of gold held in an insured bank depository in your name. You would be required to put up the value of the contract which would be about $104,000 at today's prices. There is also a Mini-Gold contract for 33 ounces. As the value of the gold changes so would the value of your gold depository. It can be sold at any time. That will cost you $50 commission. As long as it remains in your account you will receive a Bi-weekly update on its value. You will be charged a $30/month storage fee. What you are doing is taking part of your investment capital and putting it into gold instead of the US Dollar. It was the place to be in a flight to safety. That is no longer true of the Dollar.
The really great part is that you can now use the equity in the Gold to make investments in alternative investments which have little or no correlation to the standard stock and bond portfolio. This approach has historically lowered risk to the average stock portfolio, added diversification and given the potential of increased profitability. In fact, during times of economic stress, when the stock market breaks, managed futures have increased in value 11 of the last 12 times. Past performance is not necessarily indicative of future results. This is a very difficult period but I believe those who are looking for ways to profit from this, rather than hide from it, are likely to prevail.
At Worldwide Futures Systems we are constantly looking for opportunities to protect and grow the equity of our customer accounts. While stocks may be pushed higher by inflation, I see little underlying strength at this time. I am putting my money into an automated medium to long-term trend following system that trades the currency markets. It is called Dollar Trader and it has been rated as the number one system for trading both Euro Currency and Yen since its release date by independent system tracker Futures Truth Magazine.
The returns in the system table above are hypothetical in that they represent returns in a model account. The model account rises or falls by the exact single contract profit and loss achieved by the clients utilizing the listed system's trading signals in the appropriate dates, or if no actual client profit or loss available- by the hypothetical single contract profit and loss of trades generated by the systems test signals over the test period. The hypothetical model account begins with the initial capital level listed, and is reset to that amount each month. The returns reflect inclusion of commissions and fees. Commission and fee cost equil the number of monthly trades multiplied by $75.
I feel that for the reasons stated above, currencies could make large moves in the coming year. I have traded it for over 10 years and I have been very impressed with its performance. It has generated an average annual return of 83.4% of minimum margin requirement since its release date in 1996. Of course, past performance is not necessarily indicative of future results. Although it has been more volatile than I would prefer at times, the rewards have been worth the risk to me. I also feel that many commodities will take substantial moves to the upside driven by inflation. Countries like Brazil, China, Russia, Japan and India should emerge as major purchasers of commodities using cheap Dollars. Ready-Set-Go is a medium to long term trend following system that I have traded to catch major price moves in a basket of commodities. Please feel free to give me a call and I would be happy to make suggestions on developing an alternative investment portfolio to meet your personal risk/reward profile.
Good luck and good trading,
President, Worldwide Futures Systems
An investment in futures contracts is speculative, involves a high degree of risk and is suitable only for persons who can assume the risk of loss in excess of their margin deposits. You should carefully consider whether futures trading is appropriate for you in light of your investment experience, trading objectives, financial resources, and other relevant circumstances. PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.