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Tuesday, 3 January 2012

Forex Fundamentals: The Other Side Of The Coin - By Kenny


Many of you know from reading the Trader's Blog that we often talk about, and advocate, technical trading. Today's guest blogger, Georgia Anderson of GAFNN.com, also looks at "the other side of the coin," fundamental analysis, but she uses it in a way that is almost technical. In this post, Georgia is going to give us her perspective on forex and fundamental analysis by way of an input-output matrix.
Technical analysis or predicting the market by looking through the previous history a currency pair is a very useful and indispensable tool that every forex trader uses, however, fundamental analysis, like its name suggests, is more fundamental in nature, and tries to see what drives the forex market in the first place.
There are thousands of market drivers that move and influence the forex market and this fundamental data can be used in a very technical way. One way to take care of these is through the approach of an input-output matrix. This matrix contains information about the factor and its influence. In simple terms, the cause and effect due to one particular factor is captured as numbers in a matrix. By doing this for all the important factors, one can get an input-output matrix that well describes the future potential market movements.
The input-output matrix approach is used by many companies and advanced traders and is a closely guarded secret. It can make paupers billionaires and is thus a really powerful tool in the right hands. Many of the individuals or corporations that actually make regular profits through forex market have their own input-output matrix defined.
The numbers in this matrix are determined through a complex analysis of the past and anticipation of the future. In many cases, the data obtained is through special case studies of currency pairs through historic times and studying how the market behaves under special criteria.
As a simple demonstration of this fact, consider the beginning of the economic crisis, when many large US banks started failing. It was thus natural for a forex trader to sell off the USD he holds because the US economy is really weak.
However, the reality was quite different. The financial crisis that started in the US engulfed the whole world within no time. At this stage, the USD being the reserve currency for trade in the world, governments and multinational corporations began to accumulate USD to tide over the crisis. This caused a rapid expansion in demand for the USD, which caused it to rise above most other currencies like EUR or GBP.
The really smart traders who had the foresight could anticipate this through the effect of globalization on the forex market. This was captured through the rightly represented input-output matrix. The way to create this success is by looking at the past. The Great Depression provides the best clue of what happens during a sudden economic recession. Thus not everyone lost money in the recession – people who were smart and recognized the fundamentals of the forex market soon made a lot of money.
Of course even after the right matrix has been built, it is up to the trader to decide which factors will dominate the current economic and geopolitical scenarios. At times it might seem far-fetched to the untrained eye, but the people who really make money are the ones that are prepared for the most uncommonly occurring events.
For example, most advanced traders in the world today have a strategy in place if Israel attacks Iran. This is probably a very unlikely event, but it in the rare case it happens, it can shift the whole economic scenario in ways that the charts can never capture, simply because such events are unprecedented in history.
The real success of a trader using fundamental analysis lies in his ability to convert the abstract and unpredictable into numbers. Thus to maintain a matrix which includes the growth rate of China is a simple task because you can simply measure its GDP growth in terms of numbers. However, to assign weights to the fear that traders and governments will experience in case of a relapse of the recession is what distinguishes a success story from a good try. The trader thus needs to be well aware of the world around.
You should also understand the most important factor that moves not just the forex market but all financial markets of the world, namely, human psychology. Generations of traders have tried in vain to predict it with certainty, but it is this unpredictability that makes us human. Thus one needs to understand the way market reacts to news and information, especially the knee-jerk reactions.
As a guide, here are the 5 most important factors that you need to consider while looking at the financial situation of the world.
• Interest rates
• Trade balance, deficit and surplus
• GDP
• Employment scenario
• Housing scenario
Different people might have different importance levels attached to these factors.
Apart from the currencies themselves, it is important to make note of the growth and progress of other commodities, chiefly oil, gold and agricultural goods. These have a profound effect on the movement of the forex market. In addition, many forex traders simultaneously trade in commodities too.
Industrial metals are another segment to watch out for. Copper for example, has very huge fluctuations in price when the industrial output fluctuates. This is because copper is extensively used in a number of industries, and when the economy is doing well, it is quite likely that the copper prices will shoot up.
When financial security is threatened, as was the case in the current recession in the West, investors look for safe havens, like gold. This explains the rapid increase in gold prices and it touching the all time record high prices. This is only the psychology of the common investors that the very best and advanced traders make use of.
The forex market is full of surprises and it can humble even the most arrogant and overconfident investor. However, with experience and a thorough understanding of what lies behind the numbers and charts, an investor can see the real picture, the real drives of the market and thus predict the direction the forex market takes much before it is visible on the charts. This gives the investor with fundamental analysis a head-start of several days, which is like eons in the forex world.
Georgia Anderson
Georgia Anderson Financial News Network
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Georgia Anderson's Financial News Network - GAFNN - is the creation of Georgia Anderson, an Italian law school graduate who relocated to the US to enter into the financial world as a Futures and Forex Broker. During that experience she learned how traders need to share ideas and network together. Based on the needs of these professionals, she decided to create this website and start her own company.
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Gold turns lower, tracking slide in commodities, stocks - By Kate Gibson, MarketWatch


SAN FRANCISCO (MarketWatch) -- Gold prices fell from five-month highs on Tuesday as other commodities and the U.S. stock market plunged and the dollar rose.
Gold for June delivery, the most active contract, retreated $11, or 0.9%, to $1,172.20 an ounce on Comex. Earlier in the day, prices were at a five-month high and hit an intraday high of $1,192.80 an ounce.
U.S. stocks fell sharply Tuesday as concerns over Greece's bailout package and Europe's national debts weighed on sentiment.
Lazard Ltd. said earlier Tuesday a restructuring of Greece's debt is not part of what the firm has been hired to do and "has never been an option to be considered." The company has been involved in debt restructurings in Ecuador and elsewhere. Read more about Lazard's role in advising Greece.

Oil futures slid more than 3% on fears about the euro zone and a report showing a slowdown in China manufacturing. And gold's recent gains made it only too easy to sell the metal.
"The market clearly hasn't been impressed by this Greek package," said Matt Zeman, a trader at LaSalle Futures Group in Chicago. Hindering much of the safe-haven buying, however, was the strengthening dollar, he said.
"With the dollar being as strong as it is, [gold] is finally coming under pressure," he said. "The market was also kind of due for a pullback" after hitting a five-month high earlier, Zeman added.
The dollar index /quotes/comstock/11j!i:dxy0 (DXY 83.20, +0.93, +1.13%) , which contracts the greenback against six other rival currencies, rose 0.9% to 83.21 on Tuesday. See Currencies.
Metals tied to industrial uses also felt the pinch of a manufacturing slowdown in China, with copper falling to two-month lows on Tuesday. Copper for July delivery lost 10 cents, or 3.1%, to $3.19 a pound, deepening losses as other markets wobbled.
Palladium lost 5.5%, leading losses among metals. Palladium for June delivery lost $30.20 to $517.20 an ounce.
China's manufacturing activity remained in expansion in April, indicating the industrial rebound is now well into its second year of growth, though there were indications the recovery may be losing steam, according to an HSBC survey.
HSBC's survey, conducted in association with market research firm Markit, reported a Purchasing Manufacturing Index (PMI) reading of 55.4 in April, compared with 57.0 in March. The result, released Tuesday morning, ranked as the weakest reading in six months.
U.S. April auto sales jumped to 11.2 million cars and trucks from 9.2 million a year ago, according to Autodata. The results failed to stack up to the March numbers, which were goosed by incentive spending to reach 11.8 million vehicles.
Palladium is used in catalytic converters in cars. Platinum, which is also used in car catalysts, was also posting losses.
Platinum for July delivery lost $41.80, or 2.4%, to $1,687.10 an ounce.
The SPDR Gold Trust /quotes/comstock/13*!gld/quotes/nls/gld (GLD 114.72, -1.01, -0.87%) , the largest exchange-traded fund backed by gold, lost 0.8%.
Lihir Gold of Papua New Guinea is now urging stockholders to approve an improved $8.8 billion offer from Newcrest Mining Ltd. of Australia in a deal that would create one of the globe's biggest gold producers, the companies said Tuesday.
Newcrest, which made its initial bid for Lihir on April 1, on Tuesday raised its bid by 6.4%, or $8.8 billion, they said in a joint statement. Read more about the proposed deal, which is still subject to regulatory approval.
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Using Currency Correlations To Your Advantage by Kathy Lien,


To be an effective trader, understanding your entire portfolio's sensitivity to market volatility is important. This is particularly so when trading forex. Because currencies are priced in pairs, no single pair trades completely independent of the others. Once you are aware of these correlations and how they change, you can use them control your overall portfolio's exposure. (For a guide to all things forex, check out our Investopedia Special Feature: Forex.)
Defining Correlation
The reason for the interdependence of currency pairs is easy to see: if you were trading the British pound against the Japanese yen (GBP/JPY pair), for example, you are actually trading a derivative of the GBP/USD and USD/JPY pairs; therefore, GBP/JPY must be somewhat correlated to one if not both of these other currency pairs. However, the interdependence among currencies stems from more than the simple fact that they are in pairs. While some currency pairs will move in tandem, other currency pairs may move in opposite directions, which is in essence the result of more complex forces.

Correlation, in the financial world, is the statistical measure of the relationship between two securities. The correlation coefficient ranges between -1 and +1. A correlation of +1 implies that the two currency pairs will move in the same direction 100% of the time. A correlation of -1 implies the two currency pairs will move in the opposite direction 100% of the time. A correlation of zero implies that the relationship between the currency pairs is completely random.

Reading The Correlation Table

With this knowledge of correlations in mind, let's look at the following tables, each showing correlations between the major currency pairs during the month of February 2010.



The upper table above shows that over the month of February (one month) EUR/USD and GBP/USD had a very strong positive correlation of 0.95. This implies that when the EUR/USD rallies, the GBP/USD has also rallied 95% of the time. Over the past 6 months though, the correlation was weaker (0.66) but in the long run (1 year) the two currency pairs still have a strong correlation.

By contrast, the EUR/USD and USD/CHF had a near-perfect negative correlation of -1.00. This implies that 100% of the time, when the EUR/USD rallied, USD/CHF sold off. This relationship even holds true over longer periods as the correlation figures remain relatively stable.


Yet correlations do not always remain stable. Take USD/CAD and USD/CHF, for example. With a coefficient of 0.95, they had a strong positive correlation over the past year, but the relationship deteriorated significantly in February 2010 for a number of reasons, including the rally in oil prices and the hawkishness of the Bank of Canada. (For more, see Using Interest Rate Parity To Trade Forex.)

Correlations Do Change
It is clear then that correlations do change, which makes following the shift in correlations even more important. Sentiment and global economic factors are very dynamic and can even change on a daily basis. Strong correlations today might not be in line with the longer-term correlation between two currency pairs. That is why taking a look at the six-month trailing correlation is also very important. This provides a clearer perspective on the average six-month relationship between the two currency pairs, which tends to be more accurate. Correlations change for a variety of reasons, the most common of which include diverging monetary policies, a certain currency pair’s sensitivity to commodity prices, as well as unique economic and political factors.

Here is a table showing the six-month trailing correlations that EUR/USD shares with other pairs:



Calculating Correlations Yourself
The best way to keep current on the direction and strength of your correlation pairings is to calculate them yourself. This may sound difficult, but it's actually quite simple.

To calculate a simple correlation, just use a spreadsheet, like Microsoft Excel. Many charting packages (even some free ones) allow you to download historical daily currency prices, which you can then transport into Excel. In Excel, just use the correlation function, which is =CORREL(range 1, range 2). The one-year, six-, three- and one-month trailing readings give the most comprehensive view of the similarities and differences in correlation over time; however, you can decide for yourself which or how many of these readings you want to analyze.

Here is the correlation-calculation process reviewed step by step: 1. Get the pricing data for your two currency pairs; say they are GBP/USD and USD/JPY
2. Make two individual columns, each labeled with one of these pairs. Then fill in the columns with the past daily prices that occurred for each pair over the time period you are analyzing
3. At the bottom of the one of the columns, in an empty slot, type in =CORREL(
4. Highlight all of the data in one of the pricing columns; you should get a range of cells in the formula box.
5. Type in comma
6. Repeat steps 3-5 for the other currency
7. Close the formula so that it looks like =CORREL(A1:A50,B1:B50)
8. The number that is produced represents the correlation between the two currency pairs

Even though correlations change, it is not necessary to update your numbers every day, updating once every few weeks or at the very least once a month is generally a good idea.

How To Use It To Manage Exposure
Now that you know how to calculate correlations, it is time to go over how to use them to your advantage.

First, they can help you avoid entering two positions that cancel each other out, For instance, by knowing that EUR/USD and USD/CHF move in opposite directions nearly 100% of time, you would see that having a portfolio of long EUR/USD and long USD/CHF is the same as having virtually no position - this is true because, as the correlation indicates, when the EUR/USD rallies, USD/CHF will undergo a selloff. On the other hand, holding long EUR/USD and long AUD/USD or NZD/USD is similar to doubling up on the same position since the correlations are so strong. (Learn more in Forex: Wading Into The Currency Market.)

Diversification is another factor to consider. Since the EUR/USD and AUD/USD correlation is traditionally not 100% positive, traders can use these two pairs to diversify their risk somewhat while still maintaining a core directional view. For example, to express a bearish outlook on the USD, the trader, instead of buying two lots of the EUR/USD, may buy one lot of the EUR/USD and one lot of the AUD/USD. The imperfect correlation between the two different currency pairs allows for more diversification and marginally lower risk. Furthermore, the central banks of Australia and Europe have different monetary policy biases, so in the event of a dollar rally, the Australian dollar may be less affected than the Euro, or vice versa.

A trader can use also different pip or point values for his or her advantage. Lets consider the EUR/USD and USD/CHF once again. They have a near-perfect negative correlation, but the value of a pip move in the EUR/USD is $10 for a lot of 100,000 units while the value of a pip move in USD/CHF is $9.24 for the same number of units. This implies traders can use USD/CHF to hedge EUR/USD exposure.

Here's how the hedge would work: say a trader had a portfolio of one short EUR/USD lot of 100,000 units and one short USD/CHF lot of 100,000 units. When the EUR/USD increases by ten pips or points, the trader would be down $100 on the position. However, since USDCHF moves opposite to the EUR/USD, the short USD/CHF position would be profitable, likely moving close to ten pips higher, up $92.40. This would turn the net loss of the portfolio into -$7.60 instead of -$100. Of course, this hedge also means smaller profits in the event of a strong EUR/USD sell-off, but in the worst-case scenario, losses become relatively lower.

Regardless of whether you are looking to diversify your positions or find alternate pairs to leverage your view, it is very important to be aware of the correlation between various currency pairs and their shifting trends. This is powerful knowledge for all professional traders holding more than one currency pair in their trading accounts. Such knowledge helps traders, diversify, hedge or double up on profits.

The Bottom Line
To be an effective trader, it is important to understand how different currency pairs move in relation to each other so traders can better understand their exposure. Some currency pairs move in tandem with each other, while others may be polar opposites. Learning about currency correlation helps traders manage their portfolios more appropriately. Regardless of your trading strategy and whether you are looking to diversify your positions or find alternate pairs to leverage your view, it is very important to keep in mind the correlation between various currency pairs and their shifting trends. (For more, check out our Forex Tutorial.)
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Sovereign Debt Crisis: Emergency Strategy


Sovereign Debt Crisis: Emergency Strategy Update
by Larry Edelson
with Martin D. Weiss
and Mike Larson



Martin D. Weiss, Ph.D.
Martin Weiss: Just days ago, the cradle of Western democracy — Greece — was in flames! Rioters attacked banks, businesses and government buildings. The entire country plunged into chaos. Spain, Portugal, Italy and even the United Kingdom were reeling. The euro was crushed.
Then, as we have warned you consistently and persistently, the raging storm in Europe struck our shores ... ripped through our corporate bond market ... created chaos in our stock market ... and threatened to derail our already-fragile economic recovery.
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In response, Europe announced a trillion-dollar bailout while our own Federal Reserve issued a blank check to give Europe virtually any money it says it wants. And still the euro has plunged, while gold has soared to new highs! Still the crisis is not over!
All this is raising several urgent questions for investors.
First, does this new debt crisis mark the end of the big market rally since March of last year?
Second, how is the European debt crisis likely to impact your investments now and in the weeks ahead?
Third, when will this crisis hit Washington and what will they do next?


Fourth, how can you protect yourself no matter what Washington decides to do?
And fifth, gold! Gold has surged dramatically, even with the dollar rising.
How high might gold go if the dollar falls? Should investors add to their gold holdings now or wait for a correction? What about gold shares and other natural resources?
Sovereign Debt Crisis is
Really a Currency Crisis!

chart
Larry Edelson: Hi Martin, I'm calling in from Asia, and every night, while you've been sleeping, I've been watching this crisis unfold in real time. So let me tell you what I see. The sovereign debt crisis is a currency crisis! And I'm worried it's going to be a lot bigger than even I expected. The fact is Europe is sinking and the euro is crashing.
Martin: What about the trillion-dollar bailout of Europe?
Larry: It changes nothing. It means massive money printing and even more spending by bankrupt economies. The plunge in the value of their currency — any currency for that matter is the pivotal financial consequence of a sovereign debt crisis — the major consequence that we have been warning you about. I repeat: This is a CURRENCY CRISIS. Currencies are cornerstones — the stock — of a country.
This is an explosive crisis that can wipe out people's wealth without them even knowing it. But it can also provide them with the broadest opportunities for profit. My primary goal today is to guide you in this crisis, to protect your wealth and to finding nice opportunities to profit from it.
Martin: Yes! But let's start with the impact on global stocks, especially U.S. stocks. Mike?
Mike Larson: First of all, if you've been reading our alerts or you subscribe to our newsletters, you should not be loaded up with stocks. We've been warning about the dangers all along. Our cash positions are high. Despite low yields on cash, our primary concern has always been about the return OF your money — over and beyond the return ON your money.
Second, we have not been playing the stock market overall. We have been very cautiously and selectively recommending the unique stock sectors and foreign countries that have the fundamental power to endure before, during and after this crisis.
Martin: But that doesn't protect you from market crashes.
Mike: No, of course not. For that, we use hedges and inverse ETFs. We also take advantage of rallies to pare down our positions
Martin: Some folks writing in have apparently not followed that conservative approach. They are loaded up. And they want to know what to do.
Larry: I want to jump in here about gold. I want to make it clear; I don't believe investors should unload gold shares.
Martin: OK. My question to Mike is: If you're overloaded — except with gold shares as Larry interjected — what specific steps do you recommend to unload excess positions?
Mike: A good rule of thumb is to sell half of your excess holdings now and then revisit the balance when you get a good rally.
But I do have a word of warning: Even when you get the rally, it is very easy to forget the crisis. Things may appear to have quieted down, but it's really going to be just the next calm before an even bigger storm that is coming.
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Larry: For gold it is a very different strategy. Gold is going up right now despite a rising dollar. It will go up even more when the sovereign debt crisis hits the dollar, and the dollar starts plunging like the euro is. I expect it to hit $1,300, then $1,500 and then ultimately to at least $2,300 an ounce.
So core gold holdings should be held no matter what, in my opinion.
Martin: What about in the short term?
Larry: There are going to be wild zigs and zags like we are seeing in all markets. Just never forget the sheer enormity of the sovereign debt crisis, which, again, is ultimately a currency crisis.
Mike: For many years, a handful of observers have been warning with a simple message: We can't borrow and spend forever and get away with it. We warned. Others warned. But no one in the political or financial capitals around the world paid any attention. They laughed at us. They ridiculed us. Now that day of reckoning is here.
Martin: What's so utterly deceptive about these events is that they can indeed get away with it for such a long period of time.
chart
Mike: Yes, and Greece is the perfect example. For years, we knew Greece's government was going wild with its spending, and some analysts warned about it until they were blue in the face.
But even amidst all the warnings, Greek government officials would go on TV and say: "What's the problem? If we really were doing something wrong, we'd have trouble borrowing money. But look! We have hoards of investors buying our bonds. We can borrow as much as we want for less than 3%. So where's the crisis?"
That continued year after year, until one day the party ended. No one rang any bells to warn them. No one single event triggered it. The worries and warnings that had been percolating for years just reached a critical mass and blew up. Suddenly, bond investors declared a virtual buyer's strike. Suddenly, Greek bond markets collapsed. Suddenly, their interest rates were doubling and then doubling again.
Larry: A collapsing bond market goes hand in hand with a collapsing currency. Both are driven by the same government spending, borrowing and reckless money printing. Both are driven by the same global investors. When they sell euro-zone bonds, they sell the euro. If they sell U.S. dollars in denominated bonds they are going to be selling the U.S. dollar.
Look at this plunge in the euro — in just two or three weeks; it got smacked down from 1.36 to 1.25. That's a massive, 8% decline — in just three weeks.
Martin: Only 8% that doesn't sound like that much?
chart
Larry: 8% in a currency change? Are you kidding? For a major currency? Remember, this isn't just a single stock or stock market. It is the foundation of the European Union. It is their currency. It represents, in essence, the equity value of the economies of 16 countries, almost an entire continent.
If the decline continues at this pace, everything Europe produces or owns will lose half its value in about five months.
Connect the dots here. Look at this chart of gold. It is real money and has been that way for 5,000 years. As the euro is collapsing ... gold, in terms of the euro, is going through the roof!
chart
Martin: So what's the lesson you want to take out of these charts?
Larry: In the past when the euro was falling so was gold. That is not happening now. Now, you have a bull market in gold in terms of ALL major currencies. So the lesson is: It doesn't matter which major currency is crashing. They are all losing purchasing power. The key: If gold is rising in response to the euro's decline, imagine what it will do in response to a collapse in the world's reserve currency — the dollar!
The Next Big Domino
Mike: The dollar is the next big domino in this debt crisis. Look. Most people see this as a new debt crisis that just began this year. But it's not. It's the same debt crisis that began over three years ago with the housing bust. Governments in the western world went hog wild spending trillions to bail out their banks, their economies. They bought up trillions in toxic assets. They took over the crisis. And now they OWN the crisis. So it should come as no surprise that governments themselves are now the next targets of investor revenge — the next institutions that need bailouts!
Martin: This is precisely the sovereign debt crisis we warned about in our white paper submitted to Congress ...
Mike: ... when they were voting on the TARP bill to bail out the banks in September of 2008.
Martin: Now it's here. This is it!
Mike: In Europe, yes. In the U.S., not quite. In the U.S. we still see the same syndrome as we saw in Europe just a few months ago. We see virtual clones of the officials and pundits we saw in Greece — but this time from Wall Street and Washington. And they're saying almost exactly the same thing the Greek officials were saying last year: "Look," they say. "We have tons of investors rushing to buy our bonds ... and we can borrow as much as we damn please for less than 4%! So what's the problem? Where's the fire?"
Martin: I see the parallels. But it still begs the question, if the United States is in such grave danger, how come we don't see our government bond markets tanking like Greek bonds have tanked?
Mike: Because the Western world is like the Titanic ... because the U.S. bond market and dollar market, are like the stern of the Titanic.
Martin: Before the Titanic sank, the stern section was pulled up by the sinking bow. The stern actually rose up high out of the water.
Mike: Yes! And when we see a global flight to quality, we see everyone rushing to the stern — to the dollar and the U.S. Treasury market. They have the illusion that's where they can find higher ground, safety. That's why you see U.S. bond prices temporarily rising while the euro-zone bonds sink.
Larry: And why you see the dollar rising while the euro plunges. But there is not going to be any safety found in the stern of the Titanic.
Mike: As you know, Larry, countries from both sides of the Atlantic are in the same boat. Both the U.S. and Europe have all been spending like crazy for years. Both got hit by the housing bust and debt crisis. Both spent massive sums on bailouts and economic rescues. So as a result, both are loaded with debts they cannot possibly pay. And here's the key: Both are vulnerable to the same contagion that has struck Greece and much of Europe.
Larry: But I talk to a lot of American investors who, like Wall Street and Washington, are still in denial. They don't believe that our country has racked up the debt that we are talking about.
Mike: OK. Let's prove it right now. Five euro-zone countries have more debt than they can possibly manage and are in danger of defaulting. But what most people do not realize is that the United States is in the same category. It is not different. It is not special. It is ultimately equally ... or even MORE vulnerable. Consider these facts:
Spain, which just got downgraded, has 59.2 cents in debt per dollar of GDP. But the U.S. has far more — a whopping 94.5 cents on the dollar!
Martin: Our debt load is worse than Spain's!
Mike: Much worse! And look at Portugal, which also was downgraded. It's running a deficit that chews up 8.3% of its GDP. That's way out of line. But the U.S. federal deficit is significantly worse — gobbling up a whopping 10.6% of our GDP. Even compared to Greece, America's deficit level is only slightly less bad — 10.6% of GDP in the U.S. vs. 12.2% in Greece.
Larry: The U.S. is the leader of the global borrowing and spending rampage. It was ground zero of all the fiscal insanity. The U.S. government has the most domestic debts of all nations in the world — $127 trillion, including what it owes to its citizens in the form of Social security and Medicare. The U.S. has the most foreign debts of all nations in the world. So this makes you wonder ...
Martin: Greece, Portugal, Spain and the other PIIGS countries supposedly have the IMF to fall back on. The IMF has Washington to fall back on. But who's going to bail out Washington?
Larry: The answer is that there's nobody left to save America, and the American taxpayer is going to take the brunt of it. We are the world's richest nation. We are the safety net of last resort. When America's turn comes, Washington will have two and only two choices:
Choice #1: Simply walk away — default on the $12.6 trillion of national debt we owe to bond investors.
Martin: They're not going to do that.
Larry: Of course not. But they will do it indirectly and that is Choice #2 — to print more money deliberately and devalue the dollar without coming out and saying they are doing it. They believe they can pay back their debts with a much cheaper currency.
Martin: Isn't there also a third possibility — the possibility that they actually make massive, painful cuts in every major government program — including Social Security, Medicare and Medicaid — to bring the budget back into balance?
Larry: Can you imagine if Washington came out and said "We are going to cut Medicare and Social Security," or "we are going to cut back on government pension guarantees"? Look at the riots in Greece!
Martin: One of our readers just wrote in saying the pundits have a hard time believing that this crisis will spread beyond the five PIIGS countries — Portugal, Ireland, Italy, Greece and Spain.
Mike: That's the same b.s. we heard in the subprime mortgage crisis. Remember: That crisis did not start with the biggest dominos — Citigroup or Bank of America. It started with a core of small subprime lenders that were the highest risk offenders, and they ALSO said it could be "CONTAINED."
Then, it spread outward from there, and at each step of the way, they AGAIN said it would be "contained." Now, something similar is happening here. It started with the worst offender — Greece — and they said that could be contained. But you can see what the market judgment is — it has already started spreading to Spain's bond market, to Portugal's bond market and others, and they're STILL saying it can be contained!?
If the UK and U.S. and other major countries were in great financial shape, sure. But they're not. In many respects, especially in terms of our debts to China, Japan and others, we are actually in worse shape.
Larry: My view is that Bernanke is blinded by his theories of history. Geithner won't listen. Obama is mute on the subject. They see, hear and speak no trouble. But I don't care what they say about the differences between the U.S. and Europe. A broke government is a broke government. Period.
Martin: You've made your point, Larry. And so far you've been right. So let Mike and me ask you some tough questions we're getting from readers. First, what's next in your scenario?
Larry: A temporary rally in the euro is possible, followed by another collapse. Up until now, compared to our Federal Reserve, the European Central Bank has been pretty conservative. But now it's going to have to get aggressive and follow the lead of the Fed. So it's going to start printing money like crazy to fund the bailout for Greece and try to stop the contagion from rolling through the rest of Europe.
It already made a decision about a week ago to accept junk bonds as collateral on its debt, and it's already printing more money. But all this is to no avail because Europe's currency — the euro — has some unique, fatal flaws that are going to exasperate this crisis.
First of all, the euro is a rookie currency. It is an experiment that's only 12 years old. In my opinion, the currency was created ass backwards. It was put in place without a unified constitution behind it.
Martin: The euro crumbles. Then what?
Larry: Next, the Federal Reserve will print more money to fund the money they've promised. It's a desperate last-ditch stand to help defend the euro.
Martin: The Fed is now printing money to buy European bonds.
Larry: Yes. And as the crisis strikes our shores, the Fed will print even more money!
Martin: What happens in the end?
Larry: In the end, just like the euro currency plunged dramatically, the U.S. dollar will plunge dramatically. Both currencies will go down, although in different ways: The euro will fail as a currency or at least lose many of its members. And the dollar will lose its status as the world's reserve currency.
Mike: A subscriber to your Real Wealth Report is asking:
"The dollar is the world's ultimate safe haven,
the world's main currency. Doesn't that protect it?"

Larry: It did when everything was going fine for the world. But in bad times, it's likely to be terrible for the U.S., putting a huge, additional burden on our government and our people.
Look, I travel a lot and I can tell you that, in every corner of the globe, investors blame the U.S. for this whole crisis. The outcome is that everyone also looks at the U.S. to SOLVE the whole crisis. That means that a huge portion of the entire burden of the global debt crisis will ultimately fall on the U.S.
Martin: Can you sum up what's driving gold higher?
Larry: Sovereign governments are broke. The public and investors are finally realizing it and acting on it. So governments are responding by printing money and by gutting their currencies.
Martin: One reader has asked:
"I heard somewhere that Larry recommended investors put only about 10% of their money in gold and then I've heard him say that the value of gold bullion could double or more. If gold is going that high, why only 10% in gold?"
Larry: I'm not sure where that 10% figure came from, because my standing position in my Real Wealth Report has been 25% of your total investable funds in gold.
Martin: In gold bullion?
Larry: No, not all in gold bullion. About half of the 25% — 12.5% — in gold bullion and gold bullion equivalents — like the SPDR Gold Trust ETF (GLD) — or other gold bullion ETFs.
Martin: How do you buy bullion?
Larry: First let me tell you how not to buy bullion. Two gold investments I recommend people avoid with a ten-foot pole are rare (1) coins and (2) commemorative coins which are being advertised in practically every newspaper and on every TV channel.
Martin: So what is the best way to buy gold bullion — other than an ETF?
Larry: The best way to buy bullion is in 1-ounce, 5-ounce and 10-ounce ingots plus kilo bars. You don't have to pay the premiums you are paying on American Eagles or Canadian Mapleleafs.
Martin: That covers the first half of the 25%. What about the other 12.5%?
Larry: In mining shares!
Martin: Name three.
Larry: I actually have four I want to name today. And they are all cream-of-the-crop gold shares.
Goldcorp (GG) — one of my favorites — is the world's second-largest gold producer, with nearly 49 million ounces in proven and probable gold reserves, which it's producing at a cash cost of $295 an ounce.
Agnico-Eagle Mines (AEM) is a Canadian-based gold producer with just over 18 million ounces of gold — a fantastic company.
I have a mid-sized miner, Golden Star Resources (GSS), with just over 2.3 million ounces. It is not a very big player but it knows how to hunt down and add to its reserves.
Plus, one of my big favorites is Seabridge Gold (SA), an exploration company with just over 30 million ounces of gold in proven reserves. Golden Start reminds me of Royal Gold, which is up over 800% in the last nine years. Royal Gold did something unique, cutting royalty deals with miners to mine the property, and taking a royalty off the top.
Silver, Platinum and Palladium
Mike: Can we talk about silver? Many of my readers — and yours I presume as well — are saying they follow analysts who believe silver will outperform gold going forward. Can you throw some light on this?
Larry: I like silver. I am bullish on silver over the long haul. But I do not believe it will outperform gold. Silver is not a monetary metal; it's an industrial metal. And this crisis is fundamentally, a monetary crisis. That's the chief reason I'm not as bullish on silver.
Martin: What about platinum and palladium?
Larry: I prefer them over silver. They are far more in demand and in shorter supply.
Martin: You can buy GLD for gold, how can you play platinum and palladium?
Larry: The best way to play platinum is with the UBS E-TRACS Long Platinum Total Return ETN (PTM), which tracks the future prices of platinum. And the best way for palladium is the Physical Palladium Shares ETF (PALL), which tracks the futures price of palladium.
Martin: Do you recommend buying them right now?
Larry: No. Platinum was recently at a record high and same with palladium. I'd wait for a correction. Those markets have been on fire and are likely to pull back. You want to buy them near the end correction. Same thing for gold, if you are not in the gold market right now I would recommend holding for a little bit and waiting for the next correction.
Gold Stocks in a Crash?
Martin: Here's another frequent question from readers:
"I understand how gold can be a good investment if paper currencies are getting clobbered. But if the scenario you are forecasting pans out, could it also have a negative impact on stocks? Why would mining stocks, or for that matter energy and other natural resource stocks, not be negatively impacted?"
Larry: I never said they wouldn't be. In the initial panic of a crisis, investors dump everything. But that will not last. You need to hold your core position in gold during this monetary crisis as the value of paper money is getting destroyed.
Martin: What are your favorite energy plays?
Larry: Oil is not as pure as gold, but it's similar in that it's also a contra-dollar play. My forecast for oil is that it will go over $100 by next year and move higher as the dollar goes down.
As with gold, I like the big blue-chip energy companies: Chevron, Sinopec, ExxonMobil. These are going to be good investments and they're going to be revalued higher when the dollar goes lower. Meanwhile, China's first quarter oil demand was up some 9.6% over last year.
Martin: How else would you tell us to play the Chinese economy?
Larry: You need to be aware that although the U.S. and China economies have almost decoupled, the American and Chinese stock markets have not. When people panic, they tend to do it all over the world. If the U.S. market falls, so will China's — but only temporarily.
My favorite China plays: Sinopec (SHI), which I mentioned earlier, one of the leading oil and energy companies in China.
There is the FTSE/Xhinhua China 25 (FXI) should be held to take advantage of a very long-term bull market in China.
And a very interesting company doing well with copper is Jiangxi (JIXAY). China is the world's largest importer of copper.
Two Basic Strategies
Martin: Overall, what is your strategy going forward right now?
Larry: I have two strategies:
I have a core portfolio strategy with cream-of-the-crop natural resource companies, cream-of-the-crop contra-dollar real wealth tangible asset type companies — precious metals and energy — to be held in the next five years. I expect them to be substantially higher in the next five years.
Plus, I have a shorter term trading strategy for trading the swings in both directions — with more leverage and in a short burst of time.
Martin: Talk about swings! The price of oil went from $10 a barrel to $147 a barrel, a fifteen-fold increase, and then plunged to around the 30s and then back to mid $80 area. Is this a good thing or bad thing?
Larry: From a trader's point of view, it's fantastic — big moving swings can be great for making money.
Martin: And if you don't like big swings?
Larry: If you don't like the big swings, there are other natural resource assets that are also contra-dollar plays that are good for this kind of crisis. I'm talking about food and water — basic, essential consumer staples.
Martin: Larry, you've generously given us some very specific recommendations today. But, of course, timing is the key. So I have a simple wrap-up question: How can investors know the optimal times to buy and sell these investments?
If readers want to get the specifics from you, exactly what and how much to buy or sell, where and how — and they want to get that investment guidance from you on a continuing basis, what is it going to cost them?
Larry: Forty-nine dollars.
Martin: That's all?
Larry: That's all. $49.
Martin: OK. Can you explain, briefly, what they're going to get for their $49. I think you've earned the right to sing your own praises on your work, if you so desire.
Larry: I really don't think I have to. Instead, let me just tell you about what you get — the free reports you can download immediately — in the next few minutes if you like — as free bonuses for trying my Real Wealth Report.
You get a free copy of my exposé — The Mugging of America 2010. This is the report that explains why and how this disaster is going to slam not just the dollar, but also your Social Security, your Medicare and Medicaid, your income, your bonds.
You get my second free report — The 24-Karat Blunder. There are a myriad of ways that people can make a disastrous decision buying gold and spend way too much.
Martin: It also tells you the right way to buy gold, I presume.
Larry: Of course, including very specific details, such as the names, addresses and phone numbers of six gold dealers you can trust.
My third free report is Seven Hot Gold Stocks to Buy ASAP. These are stocks that are similar, in many respects, to the ones I've recommended since 2001, that could have given you gains of 83%, 144%, even up to 553%.
Martin: May I end this session with a warning? Risk is not a four-letter word that you can never ignore. The only way to totally avoid investment risk is not to invest at all. But then you face other, potentially greater risks — to your income and to your wealth.
Larry: You're absolutely right. The number one lesson of this crisis is: If you do nothing you are going to get mugged of your wealth. No matter where you go, risk is unavoidable and no one can ever guarantee profits. But I think the opportunities here are enormous, provided you have the right guidance and you act with prudence. That's what I do with my money. That's how I want to help you with yours as well.
Editor's note: For Larry's latest update on the gold and resource markets — plus more information on his three free reports — click here. Or, to skip the news and order immediately, click here. With gold already surging, timing is of the essence.
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The Breakdown Of The Forex Trading Day From 00.00 To 24.00


This will be my last post for a while as I'm heading off to Prague in a few days time for a week's break (providing the volcanic ash has cleared away by then). Anyway I thought I would write about the average trading day and discuss each period of the day, including which times of the day are the best times to trade in my experience.
All of the times below are UK time, ie GMT (or BST at the moment), so you may want to use a website such as this one to convert these times into your local time if you're not based in the UK.

00.00 - 06.00
This is arguably the quietest period of the day for the major currency pairs because the European traders are tucked up in bed and the US markets have finished for the day as well. With such low volumes, most pairs are therefore confined to very narrow trading ranges during these hours making them very difficult to trade. Some of the pairs such as those relating to the Yen, the Aussie Dollar and the New Zealand Dollar may move on occasions, but this is generally a time to stay out of the markets.

06.00 - 08.00
After the narrow trading ranges of the overnight trading session, these couple of hours can often present you with some excellent trading opportunities as we approach the opening of the London and European trading sessions. You often get strong breakouts which are fairly easy to trade if you use a few indicators such as the Supertrend (changing colour), the ADX (below 20 but moving higher) or MACD (crossovers) for additional confirmation.

08.00 - 10.00

Now the markets really start to get interesting. Once 08.00 arrives all the traders are at their desks and ready to take positions. If there hasn't already been an initial breakout during the last couple of hours, you can be sure that the major currency pairs will start to make their move during this period. Therefore this is another excellent time to enter the markets if you are trading opening range breakouts or are simply using some kind of short-term trading system.

10.00 - 12.00

This is another decent time to trade but you will often find that the opportunity to trade possible breakouts has gone by now. Nevertheless there are still good trading opportunities available because the European markets are in full swing now.

12.00 - 13.30

As lunchtime approaches the markets start to get a little bit quieter now. Plus with the US markets opening and with US economic data announcements being made very shortly (which is generally most days except for Monday), traders are happy to sit on the sidelines before committing themselves to a position. In summary, this is not a great time to be opening new positions unless you are taking a position using the longer term charts, such as the 4 hour charts, for instance.

13.30 - 16.30

Not everyone around the world is available to trade during the opening hours of the European trading session (which is the best time to trade in my opinion), but the opening hours of the US trading session is another great time to trade because volumes are very high. You have major economic data releases that can move the markets and you also have the opening hours of the US markets overlapping with the closing hours of the London and European markets.
It's not an easy time to trade because prices can fluctuate wildly and the major price moves for the day may have already occurred, but as long as you wait for all the major data releases to be released, there are still some excellent trading opportunities available across the various currency pairs.

16.30 - 20.00

I usually shut up shop at 16.30 after the London market closes (although I will still keep an eye on the markets if there is an imminent EMA crossover on the 4 hour chart during this time). In general the markets are a lot quieter during these hours and are therefore not ideal for short-term traders, but you can still get decent trends and big price moves on occasions.

20.00 - 24.00

By this time of day the volumes start to drop off even more as the US markets start to close. So again this is not a time to be employing any kind of short-term trading system. I still open a few trades using my main 4 hour system if a decent set-up presents itself during this time, but it's not ideal because you can't monitor the position overnight. You simply have to set your limit price and stop loss and see what has happened when you wake up the following morning.

Final Thoughts

So to sum up, in my opinion the best time of the day to trade forex is the start of the European trading session (0800-1000) and the two hours from 0600 to 0800 if you want to make sure you catch some of the early opening range breakouts that occur every day on the major currency pairs.
If you can't trade during this time, I suggest you concentrate on trading the first few hours of the US trading session, although this requires a lot more skill as you have the major economic releases to contend with as well as extremely high volumes, and therefore big price swings.
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How to Become a Forex Broker by eHow


Forex  Broker
With more than $1.8 trillion in currencies traded every day, the Forex is the largest market in the world. Becoming a Forex broker is a challenging undertaking that not every one is up to, but the rewards of success can include the opportunity to make a great salary, achieve helpful connections and gain an insider understanding of the Forex that can greatly assist you in trading independently or one day forming a money management fund.
Forex Broker

  1. Step 1
    Understand the Foreign Exchange Market. Read every web article and book you can to make sure you fully comprehend the workings, mechanisms and the players in the Forex market. Obtain a strong command of the various sub-disciplines that play a role in currency trading, such as macro-economics and technical analysis. Be fully checked out in modern Forex nomenclature and jargon, pricing and order conventions and all the basics of what you can expect to encounter when helping traders decide on and broker their transactions.
  2. Step 2
    Get a feel for what a Forex broker does in today's trading environment. Find practicing or retired Forex brokers to talk to about the requirements of the job and the day-to-day routines. If you don't know or can't find any in the real world, online Forex discussion groups are often an excellent venue for either locating them or finding people who can help you locate them. Be aware that with the advance of technology, the job of today's Forex broker is considerably more preoccupied with information technology than it was even 10 years ago. Many retail traders trade Forex almost entirely online, without the input of a broker. In this case, brokers are often relegated to ensuring the client's software platforms are operating soundly, their orders are being processed expeditiously and the firm's own pricing algorithms are maintaining an appropriate bid/ask spread, upon which the company depends for revenue.
  3. Step 3
    Get your professional certification. Forex brokers are grouped in with futures and commodity brokers and are typically required to pass the National Association of Securities Dealers Series 3 test. You can find and order comprehensive preparatory material for this test online but to take the actual test you'll have to be sponsored by a licensed futures brokerage firm. There are no explicit educational requirements for being a Forex broker, but a college degree in business or economics would enhance your chances of getting hired.
  4. Step 4
    Pursue a job. Decide on whether you would like to try to get hired by a large financial institution, in which case you'll probably have more stability but will have to start out lower on the employment ladder, or if you'd like to join a smaller retail brokerage firm in which you might have more responsibility to start off with, but don't have the presumed stability of a large institution. Be aware that some Forex brokerages have merged with futures brokerages and that to become a broker for one of these hybrid firms you'd probably have to accumulate additional licenses or certifications specific to the futures industry, under the purview of the Commodity Futures Trading Commission. Also, be sure to stay away from shady bucket-shop style Forex firms that are not transparent about their ownership or the nature of their operations and promise their clients unrealistically high returns or non-existent safety guarantees.
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How to Choose your FOREX Broker by eHow


A brief guide outlining some of the points you need to think about when choosing a foreign exchange broker to trade with
  1. Step 1
    First and foremost are 'spreads' and how the broker deals with them. Spreads are important as the beginner needs to minimise his risk and reduce any costs when entering and exiting a trade. Usually, spreads are quoted by the broker as being 'fixed' or 'variable' for each currency pair. I have noticed that these days, spreads are always 'variable' and few brokers offer truly fixed ones. Although they may say EURUSD has a 3 pip spread, what they mean is that this is the minimum spread. You can be guaranteed that in times of high volatility, when prices are moving quickly, the spread will increase. Note also, that some brokers increase their spreads if the 'lot' size is lower - see the types of account below. This seems a bit strange as this certainly will not encourage new business for the broker!
  2. Step 2
    One point to mention is that although this point is important for the beginner trader, as you get more experience, spreads become less of an issue when choosing a broker as they become less significant and more experienced traders will choose other features over spreads when considering what broker to choose. There are lots of websites listing broker details such as http://www.forexrealm.com/about-brokers/broker-forex-list.html - so do your homework before choosing!
  3. Step 3
    The next thing is whether the broker offers all three of the 'standard' accounts - regular, mini and micro. Regular accounts deal with full 'lots' ($10 loss or gain for each pip movement in the currency, if trading a USD pair) and therefore require the largest amount of starting capital of around $5000. Although mini accounts ($1 loss or gain for each pip movement) are now plentiful and commonplace, they still require a certain amount of capital to open that may be beyond some new traders. Micro accounts (Only 10c loss or gain for each pip movement) deal with such small sums of money that they are better than trading demo, but the risk is low when it comes to losing capital. Consequently, they require the least start-up capital in the region of only a couple of hundred dollars.
  4. Step 4
    Various checks will be done when you open an account, and if the company is based in another country, you will need to fill in various tax exemption forms such as a W-8BEN before the account will be opened, don't let this put you off!
  5. Step 5
    Various checks will be done when you open an account, and if the company is based in another country, you will need to fill in various tax exemption forms such as a W-8BEN before the account will be opened, don't let this put you off!
  6. Step 6
    If you intend to execute 'position' or 'swing' trades, such that you will be holding overnight positions, you may want to check what rates of interest will be paid/debited from your account. This is sometimes hard to find on some websites, but can be very revealing as most brokers offer poor 'carry' interest if you are in a trade for a long period of time.
  7. Step 7
    Check to see what currency pairs they offer - again, most companies offer most of the most commonly traded pairs but it's nice to see how 'established' they are by seeing if they offer other trades such as gold, S&P, futures etc.
  8. Step 8
    Unfortunately, something you can't check is the kind of service the broker offers. Most will be 'discount' brokers, which basically means that they offer no trade advice or general help and if you speak to anybody on the trading floor about your trade, they will be usually be brief and 'to the point'.

    Try to find a broker who has downloadable free software that you trade from on your computer. The other way is to trade 'live' from a website, but I find this inflexible, especially if you continually need to click between screens as this usually requires the loading of a new webpage and makes everything quite 'clunky' even if you have a fast broadband connection.

    Some brokers offer trading platform software and separate charting software, so you can use the best looking charts from one company and the platform from another - watch for variations in price quotes though!
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