currency trading
Until relatively recently, the only practical way for you to play currency (FX) markets was by wading into the potentially treacherous waters of futures contracts. This often required you to have a separate account unrelated to your stock brokerage account. Yes, you could trade on margin, putting up as little as a few thousand dollars. But because of the contract size, even a very small move against you could have been disastrous. For example, a euro FX contract is for 125,000 euros (US$185,000 at current rates). A $.0001 per Euro change equals $12.50 per contract. More often than not, investors who tried this kind of trading got beat up pretty badly for their effort unless they initially put up most of the value of the contract. But now, with currency ETFs, you can trade through your stock brokerage account and gain access to this lucrative market with an initial outlay of, say, only $1,000-$2,000 and not have to worry that a minor move in the wrong direction might wipe out your entire investment.

the price of gold
Yesterday, we awoke to find gold prices off sharply, furthering the consolidation the metal has been under for several days now. What prompted yesterday’s selling was a comment regarding gold from an official from the Bank of Korea (BoK), the South Korean central bank. Like many others recently, the Asian nation is known to be interested in diversifying its foreign reserve holdings away from U.S. dollars. At nearly $271 billion, South Korea’s dollar reserves are the sixth-largest in the world. Traders have been expecting South Korea to follow the lead of China, India and others, by adding gold bullion to its reserves. After all, among the world’s largest economies, South Korea has the smallest gold holdings with just 14.4 metric tons of gold, the equivalent to 0.03 percent of total reserves. That makes them the odd man out as most nations do hold at least a modest portion of their reserves in bullion: 10 percent on average for all nations, and considerably higher levels for the more developed nations. The U.S., for instance, has about 77 percent of its reserves in gold bullion. But contrary to expectations—and reasonable belief—Lee Eung Baek, head of the BoK’s reserve management department said in an interview, “We follow the big trend. Gold isn’t the trend.” Mr. Lee’s statement that gold isn’t in a trend is just plain wrong. As you can see from the chart below, which shows the gain for gold during the past year in both U.S. dollars and South Korean won, while the metal’s performance in terms of the Asian country’s currency has been more muted, it is in a bull market in more than just greenbacks. Indeed, gold has been a better investment than holding most paper currencies over that time. A long-term chart, say since the beginning of the decade, would demonstrate an even more pronounced uptrend for the yellow metal. In terms of the won it has gained more than 300 percent! We found it odd the South Koreans would forego the metal simply because it “offers little value,” with “no cash returns” in the worlds of Mr. Lee. Given that gold is the only “currency” that isn’t simultaneously someone else’s liability, and with so many of the world’s major currencies seemingly racing each other to the debasement cellar, to say gold offers little value is absurd. We look forward to reporting the day when the South Koreans get religion and start buying gold. We don’t know if will be at $1,500 an ounce, $1,800 or $2,000, but we’re confident that day will come. Of course chances are Mr. Lee will have gotten the boot before then. In the short term, gold could pull back further. There’s a gap in its price chart down around $1,047, so a dip slightly below that level is quite possible. But that represents a rather modest decline that would merely erase the gains of the past month. Moreover, it would set the stage for another leg up in the bull market that shows every indication of being in a major long-term bull market. A few weeks back we pointed to investors’ lackluster interest in silver as a sign that the party is just warming up in precious metals. The South Korean official’s ambivalent view toward gold is another indicator that we have far further to go on the upside. If, again in the words of Mr. Lee, “There’s an illusion in gold,” it’s that the metal isn’t a legitimate asset class that deserves a prominent place in every portfolio. Don’t let the current minor pullback shake your faith in precious metals. Instead, view it as a good buying opportunity. The fundamental case for gold remains as strong as ever.

another big quarter
Intel (INTC) has done it again. The world’s largest semiconductor chipmaker reported third quarter earnings last night that once again beat market expectations. Not only that, the quarter was so impressive that the results actually surpassed the company’s own updated guidance released two months ago. Thanks to a strong back-to-school season, growing China sales, as well as general industry restocking, Intel collected $9.39 billion in revenues, easily outpacing consensus expectations of $9.05 billion. Gross margin (percentage of sales remaining after costs of production are taken out), which has steadily risen for the last 3 quarters was 58 percent, beating the company’s own expectations of 53 percent. These two factors led to larger profits, as net income was reported at $1.86 billion, or 33 cents a share, handily beating estimates of roughly $1.5 billion or 27 cents a share. Intel, whose chips already power more than 80 percent of the world’s PC, continues to expand its global reach – particularly in China. On the company’s conference call, Intel’s CEO Paul Otellini reiterated his thoughts that Asian consumers will lead a rebound in the personal-computer industry – initiating a rebirth of year-over-year growth in that market this year (which is contrary to most analysts’ predictions). The region already accounts for 65 percent of Intel’s sales – 55 percent if you take out Japan. Gartner Inc., a technology research firm, noted that shipments of PCs in China grew by 11 percent in the second quarter over the year-earlier period, far beyond the 2.8 percent growth seen in the first quarter. Gartner has yet to release their third quarter figures, but based on Intel’s results, we expect to learn that the pace has remained torrid. Intel’s outlook for the fourth quarter was also exceptionally upbeat. The company expects revenue for the current period to be $10.1 billion (plus or minus $400 million), outpacing consensus estimates of $9.7 billion. Further, the company sees margins expanding even further, expected at 62 percent (plus or minus 3 percent). While already impressive, the margin number is also notable given that if the company can reach the high-end of its range it would represent Intel’s largest profit margin in the last decade. Needless to say, we are impressed with the company’s quarterly numbers, and think Intel is executing its fundamental business plan exceptionally well. With less reliance on the domestic market (only 20 percent of sales), and continued expansion into developing economies, Intel’s revenue stream is growing at a fast clip. The diversity of revenues also helps reduce overall business volatility. This utterly dominant company is trading at less than 15 times 2010 earnings, and with a PEG of 1.4, the shares continue to represent compelling value.

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Dow heading down

At first, I kept hoping it was a terrible mistake. It was, to say the least, most serious and most unwelcome occurrence that demanded my immediate and decisive attention I have been receiving alarming signals from our proprietary computer system. What I saw disturbed me because this system is the most powerful and consistently accurate financial forecasting tool I know. The program is signaling the strong probability that the U.S. stock market will suffer a catastrophic crash sometime in the next few months. While we’re all rooting for the DOW to hit 11,000, you could see it at 8,500 or lower within the next 6 months! I am the only one to know about this system, because along with leading Yale mathematicians, I was one of the developers of this tool. Of course, my knee-jerk reaction was, how can that be when the market has made such a significant recovery since March? You know, from reading my advisories, that I’m basically a long-term optimist. Like millions of America’s individual investors who have their retirement money and personal wealth tied to the stock market, I’ve wanted to believe in the stimulus package, to finally feel comfortable that we really were emerging from the long nightmare of this horrific economic recession. Like you, no doubt... I’ve been rooting for the DOW to end the year above 11,000... But... I’m also a realist. And, although I certainly didn’t like the forecast of a catastrophic crash, I have to admit that it did not come as a total surprise. The handwriting has been on the wall for some time. It’s just that we don’t like what it says. Let me tell you, those alarming computer signals were the clincher. I’ll go into more detail on the computer program that generated the alarming forecast and why it’s more accurate than anything else out there in a moment. But just let me say here that. . . I myself am making significant changes to what I’m doing with my own personal money as a result of this forecast! I trust it implicitly, more even than my own subjective analysis because. . . The computer is neither bull nor bear, has no love for any particular stock, does not suffer from false pride, does not need to prove how smart it is, is never in denial, and never needs to blame someone for its mistakes. That said, you don’t need a super computer to suspect that all is not right with the economy, it simple makes things more definitive. As you read on, we’ll take a rational look at the myriad and complex, interacting economic pressures at play that are rapidly merging into the dreaded perfect storm that the market bears have been predicting for some time. Because I pledged to always "put my money where my mouth is," I’ve already alerted Members of my Million Dollar Portfolio what I’m doing now to not only survive, but prosper from the coming financial collapse. But, because I take this warning of an imminent and severe stock market crash so seriously, I feel obligated to share my altered strategy with subscribers to all advisories.

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The Moving Dollar
On Friday, gold prices began a well deserved pause as employment figures came out better than expected and the dollar posted one of its best gains this year versus the euro. Gold dropped 3.74%, one of its biggest one-day losses of the past 12 months, rounding out a generally poor week for commodity players. Most commentators have been quick to view the change in gold prices as strictly the result of the dollar's move. In the short term, gold and the dollar may exhibit this inverse relationship, with gold suffering from a rebound in the dollar, which has clearly become oversold. We would not be surprised to see gold retreat as low as $1040 or $1050. Long-term however, it will take more than a recovering dollar to keep gold prices down... HARD CURRENCIES FOR A SOFTENED WORLD ECONOMY If we look at how various currencies have performed this year, we note that the best performers have been the Brazilian real, the Australian dollar, the Chilean peso, the South African rand, and the Canadian dollar. All of them gained significantly against the U.S. dollar. By contrast, the Indian rupee was flat, even though India has enjoyed much stronger growth than the U.S. And there were many currencies that underperformed our dollar. Currency movements are influenced by many factors. However, the predominant pattern that seems to be emerging is that, among the stronger currencies, the nations with the greatest resource bases have done the best. Brazil and Australia, we can argue, have the two largest resource bases in the world. Canada is resource-rich too, and its currency may have lost the bid for the top spot only because its economy is so closely intertwined with the U.S. We therefore conclude that resource independence has become the driving force among the world's currencies. Not surprisingly, gold has performed very much in line with the Brazilian and Australian currencies. In fact, it seems to have been behaving very like a currency itself, not just in 2009 but for most of this decade. As a commodity, gold has a few industrial uses. However, it is most often used as a store of value – one of the main functions of currencies in general. Therefore, its value rises as commodities become more scarce and more expensive. Gold prices could enter a long-term retreat only if commodities became abundant (and therefore cheap). In that case, the nations with the strongest currencies will be those like the U.S. which have large service-oriented economies. However, that's not very likely. By now, you know the story of Chinese growth and how it is forcing demand for commodities ever higher. This past weekend, the Chinese news reported that China aims to be meeting as much as 15 to 20% of its primary energy needs through alternative sources by 2020. That's not much time to make the conversion. The three leading alternative sources are solar, wind, and hydro. Regarding hydro, China has already developed much of its available capacity. So that implies a massive build-out of wind and solar in just a few short years. The infrastructure for solar and wind energy won't come cheap. By our calculations, China could easily spend $3-4 TRILLION over the next few years putting it in place. (And that allocates very little to transmission issues, which could easily add another couple of trillion.) On a yearly basis these expenditures alone would dramatically exceed the sum spent on China's stimulus program for the past two years. And that's just for internal consumption. By next year China will become the largest producer of wind and solar energy. China is well positioned to become the largest exporter of alternative energies. Such a program will be great for any resource currency, including gold. If we had to pick 3 commodities that will be in short supply within the next few years, they are... 1) Copper. This red metal is essential to any electrical infrastructure project and any expansion of the grid in China or other nations. What's more, it will be increasingly used in cars as we switch to hybrids and electric vehicles – both of which use twice the amount of copper as gas-driven models. 2) Silver (see recent past updates for more information on this white metal). 3) Zinc, which is primarily used in batteries and galvanized metals. As for how to profit from rising demand for these metals, it couldn't be easier... A SIMPLE PORTFOLIO FOR A RESOURCE-SCARCE WORLD The nations that will thrive in the coming commodity squeeze will be the BRACC nations: Brazil, Russia, Australia, Canada, and China. The first four are resource-rich. China is using its cheap labor and huge currency reserves to secure resources around the world. Indeed, both the stock markets and currencies of the BRACC nations (with a small question mark next to Russia) should be the strong performers from now on. The easiest way to invest in them is through ETFs. We've recommended country-specific ETFs for each of them in TCI. These five ETFs, plus gold, would make a sensible, low-risk portfolio for even conservative investors.