The (Once Mighty) US Dollar
The US Dollar has gone a touch quiet over the last few months and has even strengthened. Against Sterling for example it's now around 1.95 whereas before Christmas it was 2.05 - 2.10.
If you look at the Dollar's demise over the last 5 years you will have noticed that when it really slumps everyone gets very excited which usually marks a short-term low. It then rallies with most people forgetting about it before it then starts to slump again to new lows.
Personally I really don't see why this style of price movement won't continue in 2008 (and beyond) so the Dollar will most probably rise in value over the next several months before ending lower by the end of the year. If you want to trade the Dollar it's unlikely that you'll go far wrong following this type of strategy, ie selling strength.
Dollar Against Sterling
This exchange rate is often called 'Cable' because it was the first currency to be actively traded in real-time between London and New York via an undersea cable.
Towards the end of last year Cable got up to around $2.10 and we think there's still a good chance that prices can go above this level and possibly to $2.30 which we suggested back in the summer of 2007.
Whatever the case, readers will have known that we've been buyers of Dollars (sellers of Sterling) at 2.5cent increments above 2.00 and are looking to cover this position below $1.80. As we indicated at the time this is Sterling we're dealing with, a currency that has a very long history of being under pressure.
If the market therefore moves lower we'll take profits, but if higher add to our position (above 2.10 and up to 2.30). We are doing this with no leverage, just using our broker Interactive Brokers to change up Sterling into Dollars and then holding them as cash in the account where they obviously receive around the current US interest rate.
Approaching currencies like stocks (buying value) is a nice way to invest and something we'd encourage readers to look into. Our advice though is not to get involved in the short term trading of currencies (unless you've got the skill, experience and time) rather to look to hold these types of positions for many months if not a few years.
Commodities
The world seems to be running low of both power and food so commodities look to remain a pretty good investment class to own for 2008. Never forget though with commodities that you're most probably dealing in some of the most volatile products in the investment world.
When they get moving they're like the internet stocks (of 1998-2000) on steroids. It's therefore quite possible for a commodity such as wheat or natural gas to rise or fall by 25% in value over little more than a few weeks. For this reason investors have to watch themselves and generally follow 2 simple rules -
- Be careful about buying any commodity on excessive strength (ie don't get caught up in the hype)
- Don't put too many eggs into the same basket, spread your risk around
So if there's one tip to getting good results from commodity investment it's to look to buy only on weakness. This doesn't mean that you should only buy when the markets have been in multi-year bear markets. It's fine to buy in bull markets but only when there's a retracement or better yet still one of those short term massacres that are so prevalent in the commodity sector.
Some interesting stats about general foodstuffs -
- Wheat inventories are at their lowest for 60 years
- Corn inventories are at their lowest for 35 years
- Grains are one of the main foodstuffs for reared animals so there is a knock on effect
- The developing world is getting a taste for these grains and their consumption trends have been rising over the last several years regardless of price increases
How To Get Involved With Commodities
In the past it was a problem for the retail investor to buy commodities because they were only traded on futures exchanges. But now there are many ETFs (some refer to these as ETCs - Exchange Traded Commodities) which offer really simple exposure to the sector and more importantly no leverage unlike futures.
There are now 50+ ETCs on the London Stock Exchange and one we really like is the All Commodities DJ-AIGCI (ticker AGCP) which invests in a balanced fashion -
- 33% in energy
- 30% in agriculture
- 19% in industrial materials, and
- 9% in both precious metals and livestock
This ETC and others are offered by ETF Securities and they're all tradable on the London Stock Exchange just like a share, ie buying/selling is no different from buying/selling Vodafone shares. More details on the ETF Securities website
Below is a chart of the Goldman Sachs Commodity Index which is one of the most widely followed commodity indexes. I'm not putting a chart in of the All Commodities ETC mentioned above because it's only been listed for a few months. But this ETC will roughly mimic the GSCI.
