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The Gold Standard and Alan Greenspan

Prior to his appointment as Chairman of the Federal Reserve, Alan Greenspan was Chairman of the Council of Economic Advisors from 1974 to 1977. He wrote the now famous article regarding a return to the gold standard, which It appeared in the Wall Street Journal on Sep- READ If the world ever returned to a gold standard, currency trading greenspan011098.html would effectively end. In recent years, there were attempts to try to link currencies to gold. The Islamic dinar had emerged, providing the ability to trade using the gold-backed diner currency. Digital currencies are now emerging. They allow for internet transactions in a digital gold format. It is an exciting time to be involved in the world of currency trading.

The Gold Standard 18161933

The gold standard was a fixed commodity standard participating countries fixed a physical weight of gold for the currency in circulation, making it directly Of the major currencies, the U.S. dollar adopted the gold standard late in 1879 and became the standard-bearer, replacing the British pound when Britain and other European countries came off the system with the outbreak of World War I in 1914. Eventually, though, the worsening international depression led even the dollar off the gold standard by 1933 this marked the period of collapse in international trade and financial flows prior to World War II.

The Modern Gold Standard

The U.S. dollar used to be on a gold standard. The idea behind a gold standard is to attach the value of a currency to a fixed amount of gold that is then held in trust by the government. When you think about it, the little pieces of paper you carry around in your wallet really aren't worth a whole lot. Certainly, it costs some money to print and distribute paper money, but why is a piece of paper with 20 printed on it worth twenty times more than a piece of paper that is the same size, shape, and color with 1 printed on it It used to be worth more because the piece of paper with 20 printed on it was a promissory note from the U.S. Treasury for 20 worth of gold. You could literally exchange the paper money in your pocket for gold if you wanted to. This is obviously no longer the case, but this is where paper money in the United States got its start. From 1900 to 1934, the U.S. dollar was fixed to a gold standard of 20.67 per ounce of gold. In 1934, President Franklin D. Roosevelt...

Why People Buy Gold A Hedge against Inflation

Most people buy gold as a hedge against currency running wild and against inflationary pressures. As long as you have gold, it always retains its intrinsic value. So people will always be willing to exchange goods or services for gold because gold is real money. Money is categorized in two types fiat currency and specie. Fiat currency is the paper money that is issued by governments therefore, it is a substitute currency. It is the dollar bill we carry around or any other form of paper money in any country. In contrast, specie is actual hard money that has intrinsic value. That's the difference between the two types of currency one is real, and the other is a substitute for something that has real value. That's why most people buy gold as a currency. If fiat currency decreases in value, gold still retains its intrinsic value. Gold isn't affected by inflation, which is why many people like to own gold. It retains its purchasing power regardless of what has happened to prices because of...

Fall of the Gold Standard

The lack of guidance on how to keep money stable had disastrous consequences just two decades later. In the wake of the stock crash of 1929, the world economies entered a severe recession. Falling asset prices and failing businesses made banks subject to increased suspicion. Depositors withdrew billions of dollars of deposits and placed the banks at peril. In an astounding display of institutional ineptitude, the Fed failed to provide extra reserves needed to stem the currency drainage of the banks. Investors then sought even greater safety, turning their government notes into gold, a process that put extreme pressure on the gold reserves of the gold-standard countries. The first step towards the abandonment of the gold standard occurred on September 20, 1931, when Britain suspended all payments of gold for sterling. Eighteen months later, on April 19, 1933, the United States also suspended the gold standard as the depression worsened. The reaction of the U.S. stock market to...

Closer Look At Cold Versus Gold Stocks From 1987 Through The End Of 1989 Gold Shares Showed A Major Bullish Divergence

THE UPPER CHART SHOWS THE BASING ACTIVITY AND BULLISH BREAKOUT IN THE S& P GOLD MINING INDEX. THE BOTTOM CHART IS A RATIO OF GOLD STOCKS DIVIDED BY THE S& P 500 STOCK INDEX AND SHOWS GOLD OUTPERFORMING THE MARKET FROM THE SUMMER OF 1989. COLD SHARES REALLY BEGAN TO GLITTER IN NOVEMBER.

The US dollar moves in the opposite direction from gold prices

As indicated in Figure 10.1, gold prices and the U.S. dollar have historically had a near perfect inverse relationship and are near perfect mirror images of each other this means that when gold prices rise, the dollar falls, and vice versa. This inverse relationship stems from the fact that gold is measured in dollars. Dollar depreciation due to global uncertainty has been the primary reason for gold appreciation, as gold is commonly viewed as the ultimate form of money. Gold is also seen as the premier safe haven commodity therefore, in times of geopolitical uncertainty investors tend to flock to gold, which in essence hurts the dollar.

Why Gold Stocks Outshine Gold

During 1987 gold rose only 40 percent while gold shares gained 200 percent. From the fall of 1989 to January 1990, gold shares rose 50 percent while gold gained only about 16 percent. The explanation lies in the fact that gold shares offer leverage arising from the fact that mining profits rise more sharply than the price of the gold itself. If it costs a company 200 an ounce to mine gold and gold is trading at 350, the company will reap a profit of 150. If gold rises to 400, it will appreciate in value by only 15 percent ( 50 350), whereas the company's profits will appreciate by 33 percent ( 50 150). Figure 9.7 shows some gold mining shares benefiting from the leveraged affect of rising gold prices.

Gold Stocks Versus Money Center Stocks

Figure 9.19 shows a couple of other ways to monitor the relationship between inflation and disinflation stocks. The upper chart compares the S& P Gold Group Index to the S& P Money Center Group Index. Up to the fall of 1989, the Money Center banks were outperforming gold stocks by a wide margin. From October of 1989 on, however, that relationship changed abruptly and dramatically. As the Money Center banks collapsed, gold stocks began to rally sharply. Part of the explanation for this dramatic shift between commodity and interest-sensitive stocks is seen in the bottom chart which plots the ratio between the CRB Index and bonds.

The New Gold Standard

America abandoned the gold standard in 1971, but a new standard has arisen the widespread belief gold is the ultimate portfolio hedge. In 2006, you heard endlessly that gold is up when stocks are down, and vice versa. Common advice urged holding some gold in your portfolio as a good hedge against downside volatility. A long-held derivative is gold will protect you when capitalism inevitably fails. Something like that Hand-in-hand with that myth is the view gold's price is a reliable inflation indicator. Rising gold prices should signal bad news all around for stock investors because stock prices will drop and rising inflation will stagnate growth. But is it true The love affair with gold comes and goes, but naturally intensifies if gold prices do well for a while. If gold prices rise fast, like in 2005 and 2006 (to 25-year highs ), inflation concerns reach a fevered pitch and investors fear for stocks. that beloved movie Check out my following commentary on the Wizard of Oz.) You...

The Gold Exchange Standard

To escape the danger of the devaluation revaluation inflation cycle experienced in the interwar years, the US and the UK tried to create a 'free, stable, and multilateral monetary system'. This became known as the Bretton Woods agreement, named after the location where the agreement was signed in Bretton Woods, New Hampshire. Proposed by the Americans and accepted in July 1944, it created a monetary system resembling the original Gold Standard concept. At the same time the International Monetary Fund (IMF) was established to monitor the operation of this new monetary system. The IMF's main objectives were

Is the gold price subject to manipulation

The intraday movements have been showing an unusual pattern for many years now. In the early hours of Asian trading, the gold price tends to go up. Conversely, the afternoon fixing in London tends to trigger a downhill ride, which finds itself offset only partially in the New York session. The extreme concentration of futures positions seems particular as well currently14 three US banks are positioned net-short to the tune of 12.3mn ounces. This is equal to more than 15 of global production. In a speech in July 1998 Alan Greenspan addressed this context, saying that central banks stand ready to lease gold in increasing quantities should the price rise.15 The article Gibsons's Paradox and the Gold Standard by Lawrence Summers, currently chairman of the economic advisory board of President Obama, is another example. In this article, Summers explains the connection between low key lending rates and the gold price. Paul Volcker, former chairman of the Federal Reserve (1979 to 1983) and...

The Gold Standard

The nineteenth century was when gold was officially made the standard value in England. The value of paper money was tied directly to gold reserves in America. Foreign exchange, as we know it today, has its roots in the gold standard, which was introduced in 1880. The main features were a system of fixed exchange rates in relation to gold and the absence of any exchange controls. Under the gold standard, a country with a balance of payments deficit had to surrender gold, thus reducing the volume of currency in the country, leading to deflation. The opposite occurred when a country had a balance of payments surplus. Thus the gold standard ensured the soundness of each country's paper money and ultimately controlled inflation as well. For example, when holders of paper money in America found the value of their dollar holdings falling in terms of gold, they could exchange dollars for gold. This had the effect of reducing the amount of dollars in circulation. Inevitably, as the supply of...

A new gold standard

One idea that was completely unthinkable a few years ago has been raising its profile recently. A new gold standard has been demanded by many so as to thwart the consequences of the excessive growth in money supply. If the balance sheet total of the Federal Reserve (M0) of almost USD 1.7 trillion were to be covered by the official gold reserves of 8,134 tonnes, one ounce of gold would be valued at USD 6,500. Including Japan and China - i.e. the world's second and third-largest economies - would push the price to almost USD 10,000 ounce. Gold stability However, we do not expect a new gold standard to find the necessary political backing, given that that system would only allow minor levels of new debt. On the other hand, over the past few months we have seen a lot of things happen that many would have considered utopian and completely inconceivable. Therefore we cannot fully exclude the introduction of a new gold standard. In the absence of the gold standard, there is no way to protect...

Special Report Gold

Since our initial recommendation in 2007 at USD 650, gold outperformed almost every other asset class. The gold bull market has been running with an annual performance of 16 since 2001. Gold closed the year 2008 with the eighth annual increase in a row. And in the year to date, the performance has been outstanding as well the gold price has recorded an increase of 7 (in USD) and 8 (in EUR) 1, respectively. The average price in 2008 was USD 872 ounce, i.e. 25 higher than in 2007 (USD 695). The strongly expansive policy followed by the central banks and the resulting money creation at historic levels as well as the massive expansion of government debt around the globe might make inflation literally the problem of the coming years. In conjunction with the almost worldwide zero-interest policy and the rising criticism regarding the US dollar as global reserve currency, in our opinion this situation offers a perfect basis for further increases in the gold price. Many a market participant...

Myth 3 Gold does not pay interest

Preserves purchase power of the asset as well as through price increases. The US dollar has lost more value and than 95 of its purchase power since the creation of the Federal Reserve in 1913, whereas purchasing gold has increased by a factor of 50 during the same period. The decline in purchase power power has been particularly pronounced since the abolishment of the gold standard the US dollar has

Myth 5 In periods of deflation gold is a bad investment

The fact that gold is an excellent hedge against inflation should have established itself more or less as common knowledge. Investors use it to protect themselves against the erosion of their purchase power. However, the development of gold in a deeply deflationary environment has not been subjected to much analysis. The only relevant period that would lend itself to comparison is the Great Depression of the 1930s. However, those were the times of the gold standard, i.e. the gold price was fixed.

Depreciation of selected currencies vs gold end of March 1934 as compared to gold parities 1929

This means that enormous buying pressure had been building up during the period of the gold standard. When in 1933 the gold reserves had fallen to the minimum requirements, President Roosevelt instructed that all private gold holdings be confiscated. All gold exports were discontinued, and the dollar depreciated massively against gold. Gold shares, on the other hand, were going from strength to strength. The development of the most important gold producer, Homestake Mining, can serve as reasonably approximate series for comparison. From 1929 to end-1935, the share price increased from USD 75 to above USD 500, and dividends totalled USD 130. However, the strongest increase only happened after the period of deflation (1929-1932) and as the sudden onset of inflation (1932-1935). We would envisage a similar scenario for the future. The stability of the gold shares during the general crash on the equity markets was probably due to the fact that the gold price was fixed and the revenues of...

Central banks revising their opinion in the eleventh hour

Ecuador recorded large-scale purchases. The central bank more than doubled its reserves and now holds 54.7 tonnes of gold. Venezuela continues to buy as well, its reserves have increased to 363 tonnes, i.e. 36 of its total reserves. Russia has recently bought 90 tonnes, and the past 26 months have seen reports of gradually increasing gold reserves. Prime Minister Putin has confirmed that he wishes to step up gold to 10 in terms of total reserves. And there are similar

Sales and upper limits of the two gold agreements

A total of 3,800 tonnes of gold has been sold over the past decade, although the timing of the sales transactions was rather bad the European central banks alone destroyed more than USD 40bn of value because of bad timing. Many nations (e.g. Spain, France, Portugal, the Netherlands) followed the British example and sold large parts of their gold reserves at prices of between USD 280 and 300 ounce.

Recessions are no positive environment for gold

Contrary to the general opinion on the market, recessions are no optimal environment for rising gold prices. During the past eleven recessions in the USA the average performance of gold was +4.8 , whereas the Dow Jones index gained 6.87 in the same period of time19. In periods of growth the average performance was +51.95 (since 1945) against 75 of the Dow Jones Industrial index. This would prompt the conclusion that the measures taken during the downturn, especially those of monetary and fiscal nature, lay a positive foundation for the gold price, but that the price only rises once the economic situation has improved.

Golden China

China admits According to a report of the state-run news agency Xinhua China holds gold reserves to the secret gold tune of 1,054 tonnes. Xinhua relies on numbers given by the Director of the State purchases Administration of Foreign Exchange (SAFE), Hu Xiaolian. This means that China has increased China and India also recommended to the IMF that it should sell all of its holdings of gold reserves, i.e. currently 3,217 tonnes, in order to support the poorest developing countries. China is likely to buy 403 tonnes of gold from the IMF directly in a first step - perhaps within the framework of a newly to-be-arranged selling programme. We do not believe that altruism has spawned this proposal, but rather the intention of Chinese and Indian leaders to buy the IMF gold themselves.

Goldsilver ratio

Dow gold ratio Dow gold ratio Currently the ratio is at 8.3, the historical median is 5. This means that gold is still attractively valued in comparison with US shares, albeit not quite as attractively as in 2000. The Dow gold ratio hit its lows in 1932 and 1979 at 1. Following this ratio, and assuming a stable Dow Jones index, gold would therefore have to increase to almost USD 8,300.

All Markets Are Related

What this means for us as traders and investors is that it is no longer possible to study any financial market in isolation, whether it's the U.S. stock market or gold futures. Stock traders have to watch the bond market. Bond traders have to watch the commodity markets. And everyone lias to watch the U.S. dollar. Then there's the Japanese stock market to consider. So who needs intennarket analysis I guess just about everyone since all sectors are influenced in some way, it stands to reason that anyone interested in any of the financial markets should benefit in some way from knowledge of how intennarket relationships work.

Brief History of Currency Trading

The Gold Standard, 1816-1933 The gold standard was a fixed commodity standard participating countries fixed a physical weight of gold for the currency in circulation, making it directly redeemable in the form of the precious metal. In 1816 for instance, the pound sterling was defined as 123.27 grains of gold, which was on its way to becoming the foremost reserve currency and was at the time the principal component of the international capital market. This led to the expression as good as gold when applied to Sterling the Bank of England at the time gained stability and prestige as the premier monetary authority. Of the major currencies, the U.S. dollar adopted the gold standard late in 1879 and became the standard-bearer, replacing the British pound when Britain and other European countries came off the system with the outbreak of World War I in 1914. Eventually, though, the worsening international depression led even the dollar off the gold standard by 1933 this marked the period of...

Contingent Claim Valuation

An asset can be valued as a call option if the payoffs on it are a function of the value of an underlying asset if that value exceeds a pre-specified level, the asset is worth the difference if not, it is worth nothing. It can be valued as a put option if it gains value as the value of the underlying asset drops below a pre- specified level, and if it is worth nothing when the underlying asset's value exceeds that specified level. There are many assets that generally are not viewed as options but still share several option characteristics. A patent can be analyzed as a call option on a product, with the investment outlay needed to get the project going considered the strike price and the patent life becoming the life of the option. An undeveloped oil reserve or gold mine provides its owner with a call option to develop the reserve or mine, if oil or gold prices increase.

The Goal of This Book

The purpose of this text is to provide an understanding of foreign exchange trading. Although I may reference historic changes in the international currency system, the past does not necessarily reflect the future because the entire concept of foreign exchange has changed and continues to change. The Bretton Woods Accord is interesting, but irrelevant to today's market. Debating a gold standard is an interesting intellectual exercise, but may have no bearing on how currencies are valued today.

External Rather Than Internal Data

Traditional technical work has tended to focus its attention on an individual market, such as the stock market or the gold market. All the market data needed to analyze an individual market technically pricc. volume, open interest w as provided by the market itself. As many as 40 different technical indicators on balance volume, moving averages, oscillators, trendlines, and so on were applied to the market along with various analytical techniques, such as Elliott Wave theory and cycles. The goal was to analyze the market separately from everything else.

Exploring the Currency Market

The roots of our modern forex market are an interesting topic that has been covered ad nauseum by other trading books however, I do believe it is important to have some knowledge of the market's history, so this section covers the key points. If you have never studied global monetary systems, consider this section an abridged history of the forex market. The modern forex market's roots began with over-the-counter currency trading desks established by banks throughout the 1970s and 1980s, following the collapse of a postwar-era monetary system known as the Bretton Woods system. Bretton Woods was established in June 1944, as World War II came to a close. The Allied nations sought to establish a new monetary system to promote global investment and capitalism and to eliminate the challenges of a gold standard system. Under the Bretton Woods monetary system, member nations agreed to value their currency at parity to gold 1 percent and then set their exchange rate against the U.S. dollar....

Forex and the Global Economy

On August 15, 1971, President Richard Nixon altered the world of money by taking the U.S. off the gold standard and eliminating the convertibility of gold. This created the era of fiat money. By 1973 gold went to 140 an ounce. It was a huge historical moment that few people now understand or remember. It is worth studying and gaining an understanding of why the U.S. decided to leave the gold standard. At that time Europeans held more than 1 trillion U.S. dollars. The U.S. government feared the risk that at any time a substantial amount of those dollars could be convered into gold, causing severe disruption to the U.S. economy. It was politically and economically a huge risk that hung over the political horizon. Additionally, Nixon wanted to stimulate U.S. growth through a weaker dollar. As a result of Nixon's decision, the world entered a floating rate exchange system and the modern era of currency trading really began at this time. Many people have called for a return to a gold...

The first options markets

While trading in precious metals was up in the United States by 41.0 per cent to 13.9 million contracts in the first half, trading in these products outside the United States declined by 14.5 per cent to 19.4 million contracts. Gold futures at the New York Mercantile Exchange rose by 29.9 per cent to a total of 7.7 million contracts in the first half, while gold options trading at Nymex climbed by 41.1 per cent to 2.4 million contracts. Silver futures trading at Nymex also grew, up by 47.8 per cent to 2.7 million contracts for the same period. The decline outside the United States was mainly due to a slowdown in gold futures trading at the Tokyo Commodity Exchange, where volume in that contract declined by 30.0 per cent to 10.2 million contracts in the first half.

1914 To The Armistice

In the first period, that is from the outbreak of the World War until the Armistice, the depreciation of the German mark was relatively slow. In October 1918 a gold mark was worth 1 -57 paper marks. More rapid was the rise of wholesale prices, from 1 (1913) to 2-34. In that period the issues of paper money increased more rapidly than the price of a gold mark expressed in paper marks and than the genera prices of goods, as is shown in the following figures and in Diagram 1

The Operation Of Margins

To illustrate how margins work consider an investor who contacts his or her broker on Monday, June 1, 1992, to buy two December 1992 gold futures contracts on the New York Commodity Exchange (COMEX). We suppose that the current futures price is 400 per ounce. Since the contract size is 100 ounces, the investor has contracted to buy a total of 200 ounces at this price. The broker will require the investor to deposit funds in what is termed a margin account. The amount that must be deposited at the time the contract is first entered into is known as the initial margin. This is determined by the broker. We will suppose this is 2,000 per contract, or 4,000 in total. At the end of each trading day, the margin account is adjusted to reflect the investor's gain or loss. This is known as marking to market the account. TABLE 2.1 Operation of Margins for a Long Position in Two Gold Futures Contracts

Modeling Financial Markets

The number of candidate predictors available for developing prediction models is limited only by the imagination of the analyst. The primary source of candidate predictors is from the time series being modeled. For the gold model, one would first use the gold price series as a source of candidate predictors. Often a number of predictors might be variations on the same theme. For the gold example, the most obvious choices of candidate predictors are past changes in gold prices. For example, the relative change in the prices of gold over one, two, and three time periods can be selected as the first three candidate predictors The variable GOLD represents a time series of gold prices, and the LAG operator returns the series being lagged by the number of records indicated as the second parameter. The next theme might be ratios based on the current price of gold and moving averages of gold prices. For example

The Greener Pastures Effect

One of the psychological snares that entrap all of us from time to time is the false assumption that we are missing the boat because our investments are consistently underperforming. At the end of every quarter Barron's, Money, and other financial magazines and newspapers report the performance of the top mutual funds. Naturally, they place great emphasis on the top performers. Statistics show that very few individuals have the good fortune to have invested their money in these funds, yet this publicity often leads us to believe that our investments are performing poorly. Before we make any ill-considered changes, we should remember that such funds are rarely, if ever, consistently at the top of the league. Often the funds on the list have achieved their position purely because their investment philosophy is in vogue or because they represent a particular market sector such as biotechnology or gold shares. These funds do not normally remain on the best performers list for more than...

The Great American Inflation

During the 19605, America flooded the world with dollars, which were lent and re-lent in the so called Eurodollar* market -the market in dollars outside America. The result was an oversupply of dollars around the world, at a time when the economic miracles were happening in continental Europe and Japan. While the American economy ambled forward, weighed down by the burden of the Vietnam war, between bouts of balance of payments trouble, the countries of the German-zone* and Japan surged ahead on a wave of export-led growth. This put remorseless pressure on the dollar, which was forced off the gold standard in 1971.

The Price Level and Gold

Price Level Goldstandard

As described in detail in Chapter 10, a gold standard restricts the supply of money and hence the inflation rate. But from the Great Depression through World War II, the world shifted to a paper money standard. Under a paper money standard there is no legal constraint on the issuance of money, so inflation is subject to political as well as economic forces. Price stability depends on the ability of the central banks to limit the supply of money and control the inflationary policies of the federal government. The chronic inflation that the U.S. and other developed economies have experienced since World War II does not mean that the gold standard was superior to the current paper money standard. The gold standard was abandoned because of its inflexibility in the face of economic crises, particularly the banking collapse of the 1930s. The paper money standard, if properly administered, can avoid the banking panics and severe depressions that plagued the gold standard. But...

The Bretton Woods System

Convertibility ended with the Great Depression. The major powers left the gold standard and fostered protectionism. As the political climate deteriorated and the world headed for war, the foreign exchange markets all but ceased to exist. With the end of World War II, reconstruction for Europe and the Far East had as its base the Bretton Woods system. In 1944, the postwar system of international monetary exchange was established at Bretton Woods in New Hampshire, USA. The intent was to create a gold-based value of the American dollar and the British pound and link other major currencies to the dollar. This system allowed for small fluctuations in a 1 band.

Example 54 FRM Exam 2000Question 4Capital Markets

On Friday, October 4, the spot price of gold was 378.85 per troy ounce. The price of an April gold futures contract was 387.20 per troy ounce. (Note Each gold futures contract is for 100 troy ounces.) Assume that a Treasury bill maturing in April with an ask yield of 5.28 percent provides the relevant financing (borrowing or lending rate). Use 180 days as the term to maturity (with continuous compounding and a 365-day year). Also assume that warehousing and delivery costs are negligible and ignore convenience yields. What is the theoretically correct price for the April futures contract and what is the potential arbitrage profit per contract

Special Drawing Rights

By now markets were becoming increasingly unstable, reflecting confused economic and political concerns. In May 1968, France underwent severe civil disorder and saw some of the worst street rioting in recent history. In 1969, France unilaterally devalued the franc and Germany was obliged to revalue the Deutschemark. This resulted in a two-tier system of gold convertibility. Central banks agreed to trade gold at 35 an ounce with each other and not intercede in the open marketplace where normal pressures of supply and demand would dictate the prices. As an artificial asset kept on the books of the IMF, SDRs were to be used as a surrogate for real gold reserves. Although the word asset was not used, it was in fact an attempt by the IMF to create an additional form of paper gold to be traded between central banks. Later, the SDR was defined as a basket of currencies, although the composition of that basket has been changed several times since then.

Consecutive High and Low Close Sequences

The period illustrated in Figure 2.9d shows the strong nature of sentiment for bulls and bears in the gold market. When there is a run up or down, it can extend out. In downward sequences, the maximum hit twelve consecutive low closes. For upward sequences, the maximum was thirteen consecutive high closes. However, the bullish sentiment demonstrated an ability to sustain high closes of eight, nine, and ten in a row. This is in contrast to the sequences of low closes. Strategically, traders of gold in either direction should be looking to exit when a sequence is reaching its frequency distribution maximum.

Foreign Exchange Markets

In a nutshell, a foreign exchange rate is a swap of interest rates denominated in different currencies. Foreign exchange trading originated in 1971 when the gold standard collapsed under the heft of U.S. debt. From 1971 until the late 1980s, foreign exchange traded entirely among commercial banks that made deposit arrangements in different currencies. Commercial banks had exclusive access to inter-dealer networks, consisting of loose groups of third-party agents facilitating quick distribution of orders among different commercial banking clients. Investment banks, such as Goldman Sachs, had no direct access to the inter-dealer networks and transacted their foreign exchange trades through commercial banks instead.

The Conditions Of The National Finances In I92i And I922

Of taxation from about 400 million gold marks, which was the figure at the beginning of the financial year, to 113 million in November, in which month the depression of the exchange rate was greatest (1 gold mark 63 paper marks). But even the expenditure, computed in gold marks, diminished in a parallel manner, so that not even for the financial year 1921 can it be affirmed that the budget deficit was provoked by the depreciation of the mark. Indeed, the increase of the floating debt did not show, after August 1921, an increase any more rapid than that of the preceding months.

Stable Earnings Better Investment

Even as he bought the stocks, he found that many of them were pricey, trading at high multiples of earnings, suggesting that other investors had come to the same conclusion as Larry about the low risk and high quality of these stocks. Having bought the stocks, he also noticed was that stock prices were volatile at some of these companies, even though their earnings were stable. One of the stocks in Larry's portfolio was a gold mining stock and when gold prices jumped because of a crisis in the Middle East, Larry noticed that the company did not report higher earnings, even though other gold mining companies did. When he confronted management about this, they admitted they used gold futures contracts to hedge risk. While these contracts reduced their exposure to downside risk, it also reduced their upside profits. When Larry assessed the end results of his portfolio, he found that he had still been exposed to risk and had relatively little to show for it. Larry's search for a free...

Trading an ABC Bearish Pattern

The example above illustrates an ABC Bearish reversal pattern in daily Gold futures chart. Gold made a 20-day swing high of 658 in December. During mid December, Gold reached a swing low of 621 (at B). At the beginning of January 2007, Gold retraced 78.6 of the AB level to another swing high at C to complete the ABC bearish pattern. A wide-range bar signaled a potential short trade.

How We Got Started in Gold Buying Coins from the Government

Hugh started seriously investing in precious metals in 1981, and he has continued to buy gold coins since then. The process hasn't changed a lot since 1981. Buying gold coins is actually a tradition in Hugh's family. It's a fairly strong tradition among Europeans, as well as among Americans who lived during the Depression. Hugh looked at this not as collecting coins, which is entirely different (we describe Hugh was living in Austria at the time, and he started buying gold coins from the Austrian government by way of Austrian banks, which sell old coins from the Austrian government to the general public. There's quite a business in doing that because people know that they are buying government coins directly from a bank. They know their purchase is safe because the government does not have a reputation of ripping people off and giving them phony coins. (Similarly, years ago, the U.S. government mandated that people could make investments in IRAs, for example, only in U.S....

An Historical Perspective

Does this mean we are left in exactly the same situation as the one prevalent in the age of the gold standard Probably not. However, many observers agree on the growing instability of the economic system and believe that the likelihood of escaping economic and financial crises in the years ahead seems small (Kindleberger, 2000).

Forming Currency Alliances Group of 5 G5 and Group of 7 G7

It was Germany's currency manipulation during the 1960s and early 1970s that forced the United States to call it quits on the Bretton Woods Accord. Of course, this is a rather simplistic view, but Germany was engaged in draining U.S. gold reserves through a process of dollar accumulation and conversion. Using its positive balance of trade, Germany could harvest dollars and go to the Gold Window to reap the precious metal at the established 35 per ounce exchange rate. Without a floating dollar, the United States was at the mercy of the treaty's shortsightedness. The solution was simple. President Nixon closed the Gold Window.

Some of the darlings of the day you mentioned a few minutes agogold oil real estate and currenciesare often considered

The average investor gets in their head to buy gold or whatever the TV expert is hawking that day, and they put gold back in their portfolio permanently (usually near a market top in that sector, since that is usually why the TV expert is talking about it). He or she was brought on the show because the public is suddenly clamoring for more information about these easy profits. They will stay through the commercials to learn about how and why to buy, or not yet buy, this asset class they know nothing about, whose chart has begun to look parabolic.

Currency Realignment and the Evolution of Currency Trading Theory

As FOREX trading evolved during the 1970s, the focus was, indeed, on balance of trade. The relationships seemed simple. Countries whose goods were in the greatest demand had the highest currency parity. Ah, life was easy. However, the global economy grew far faster than most had envisioned. In fact, money and currency transformed from exchange mediums to commodities, but with a twist. Once the gold standard was removed, money supply could expand and contract more freely. This set the stage for various revaluations that provided spectacular profit opportunities.

The Fundamental Essence Of Real Options

The use of traditional discounted cash flow alone is inappropriate in valuing certain strategic projects involving managerial flexibility. Two finance professors, Michael Brennan and Eduardo Schwartz, provided an example on valuing the rights to a gold mine. In their example, a mining company owns the rights to a local gold mine. The rights provide the firm the option, and not the legal obligation, to mine the gold reserves supposedly abundant in said mine. Therefore, if the price of gold in the market is high, the firm might wish to start mining and, in contrast, stop and wait for a later time to begin mining should the price of gold drop significantly in the market. Suppose we set the cost of mining as X and the payoff on the mined gold as S, taking into consideration the time value of money. We then have the following payoff schedule

Inflation and Real Yields

And I think this has been true ever since currencies began to float freely in 1973. Admittedly the professionals didn't quite see it that way in the old days. But while we're at it, we might as well blow their secret. The professionals made a bundle of money in the 1970s, and the way they made it was very simple. They only had two rules. One has been valid as far back as the memories of currency traders went sell the crisis. When a currency got into trouble, all you needed to do was wait until the central bank came in to support it and then sell for all you were worth. It always worked for sterling, the lira, French franc, whatever. The other rule, when the dollar went off the gold standard, was even simpler sell the dollar.

Freefloating Currencies

In late 1971 and 1972, two more attempts were made to establish free-floating currencies against the U.S. dollar the Smithsonian Agreement and the European Joint Float. To float a currency simply means to create a policy by which a strong economic currency is used, such as the U.S. dollar (USD), which in turn is anchored to the price of gold as a benchmark (also known as the gold standard) to bring stability to a volatile global economic situation. All other weaker economic currencies are then fixed against the USD and allowed to fluctuate, or float, no more than 1 percent on either side of the fixed rate. If the fixed rate moved more than 1 percent, the central bank of that country was required to intervene in the market until the exchange rate was brought back to within the 1 percent band.

Buying Coins as Collectibles

Buying coins as collectibles is very different from buying gold or silver coins as a hedge against inflation, which is, in essence, buying coins to use as currency. Coin collectors who buy gold or silver coins actually have more in common with people who collect fine art, antiques, jewels, or rare stamps. Moreover, collecting coins is also not investing. For example, if you found an old gold Greek or Roman or Persian coin, it would have a huge amount of value because of its collectible value. The actual gold value in that coin is relatively small. The coin's value is that of a rare historical item. This is why Europeans and many Americans who lived through the Depression buy gold and silver coins because they know that when they need money to eat or for any other survival reason, they can simply use their gold and silver. We know many people who have silver coins in their collections, like cartwheels (U.S. silver dollars, also known as Morgan dollars) and half dollars and silver...

Currencies and Other Financial Markets

Gold is commonly viewed as a hedge against inflation, an alternative to the U.S. dollar, and as a store of value in times of economic or political uncertainty. Over the long term, the relationship is mostly inverse, with a weaker USD generally accompanying a higher gold price, and a stronger USD coming with a lower gold price. However, in the short run, each market has its own dynamics and liquidity, which makes short-term trading relationships generally tenuous. Overall, the gold market is significantly smaller than the forex UljP market, so if we were gold traders, we'd sooner keep an eye ' on what's happening to the dollar, rather than the other way around. With that noted, extreme movements in gold prices tend to attract currency traders' attention and usually influence the dollar in a mostly inverse fashion.

The Foreign Exchanges under Conditions of Inconvertible Paper Money

The doctrine according to which, in the case of paper standards, the rate of exchange between the monetary standards is determined, essentially, by the quotient of the purchasing powers of these standards in their respective countries (Cassel), is based on the hypothesis that gold prices of goods tend, in various countries, to a uniform level. Thornton and Wheatley, who were the originators of the Purchasing Power Parity Theory, were also supporters of the theory of the international equalization of commodity prices. The Purchasing Power Parity Theory, if it is to be anything more than a mere truism, must be interpreted thus Both country X and country Y produce, say, iron, whose price expressed in the respective currencies is, in conditions of equilibrium, px in X and py in Y. Suppose that iron can be easily transported from X to Y and vice versa, the price of iron in the currency of X ought to be equal to that in the currency of Y multiplied by the exchange rate (neglecting transport...

Investing in Platinum Palladium and Titanium

Some people think that investing in platinum, palladium, and titanium is similar to investing in truly precious metals like gold and silver. You can buy platinum, palladium, and titanium in bar form (for example, in 10-ounce bars), the way you can buy gold and silver. You can typically buy them from the same people who sell gold and silver bars. But when you buy these metals, you have the same decision to make that you have when you buy gold or silver Do you get a certificate or a warehouse receipt that says you own x ounces of platinum, or do you take physical delivery It's up to each investor to decide. We are seeing more investors who want to take physical possession or who want to have their bars stored in a facility that they're comfortable with. But if you elect to take physical possession of the metal you buy, what do you do with it We have clients who buy platinum bars, some through GoldMoney and some through the Delaware Depository Service Company (both of which we mentioned...

The Problem Of Lead Time

Although the inverse relationship between both markets is clearly visible, there's still the problem of lead and lag times. It can be seen that turns in the dollar lead turns in the CRB Index. The 1985 top in the dollar preceded the 1986 bottom in the CRB Index by 17 months. The 1988 bottom in the dollar preceded the final peak in the CRB Index by six months. How, then, does the chartist deal with these lead times Is there a faster or a more direct way to measure the impact of the dollar on the commodity markets Fortunately, the answer to that question is yes. This brings us to an additional step in the intermarket process, which forms a bridge between the dollar and the CRB Index. This bridge is the gold market.

Foreigncurrenciesandgold

Now another dimension will be added to this comparison. Gold trends in the opposite direction of the dollar. So do the foreign currency markets. As the dollar rises, foreign currencies fall. As the dollar falls, foreign currencies rise. Therefore, foreign currencies and gold should trend in the same direction. Given that tendency the deutsche mark will be used as a vehicle to take a longer historical look at the comparison of the gold market and the currencies. It's easier to compare the gold's relationship with the dollar by using a foreign currency chart, since foreign currencies trend in the same direction as gold.

Commodity Correlations

Demand for commodities, such as gold, oil, and slocks, will change the value of a currency. Why* If yon wanted to buy gold, you would do so with the local currency of the producer. Therefore, you would sell yoitr currency So buy the local currency arid ihen irade it for gold.

S12 531 314 122b 1014 731 51s 32 1214 929

Hi September of 1989, the mark formed a second bottom which was much higher than the first. The gold market hit a second bottom at the exact same time, forming a double bottom. The pattern of rising bottoms in the mark entering the fall of 1989 formed a positive divergence with the gold market and warned of a possible bottom in gold. Needless to say, the rebound in the mark and the gold market corresponded

Gold As A Leading Indicator Of The Crb Index Crb Index

Figure 5.13 gives a closer view of the events entering the fall of 1989. While the CRB Index has continued to drop into August September of that year, the gold market is holding above its June bottom near 360. The ability of the gold market in September of 1989 to hold above its June low appears to be providing a positive divergence with the CRB Index and may be warning of stability in the general price level. Bear in mind also that the double bottom in the gold market was itself being foreshadowed by a pattern of rising bottoms in the deutsche mark. The sequence of events entering the fourth quarter of 1989, therefore, is this Strength in the deutsche mark provided a warning of a possible bottom in gold, which in turn provided a warning of a possible bottom in the CRB Index. The relationship between the dollar and the gold market is very important in forecasting the trend of the general commodity price level, and using a foreign currency market, such as the deutsche mark, provides a...

Difficulties In Ascertaining Exchange Rates And Internal Prices In Germany

Tables iv to vn in the Appendix show (1) the monthly average values of the gold mark, expressed in paper marks, according to the daily quotations of the dollar at Berlin (2) the ratios between the monthly index numbers of German wholesale prices, in paper marks, and the index numbers of American prices, according to the Bureau of Labour (3) the coefficients of divergence between the internal and external values of the mark the external value being calculated (a) on the basis of the index numbers of the Bureau of Labour and (b) on the basis of the index numbers of the gold prices of goods imported into Germany. Besides some technical difficulties regarding the determination of the average level of gold prices and of the dollar exchange rate, it is of interest to notice that in the last phase of the depreciation of the mark, which began in the summer of 1923, the purchasing power of the paper mark, at a given moment, in terms of gold or of domestic goods, was also uncertain.

Trading Descending Triangle

The above example illustrates a Descending triangle from the daily Gold futures chart. In July 2006, Gold reached 700 and retraced to 620 by the mid of July. Gold made a series of lower highs and a flat bottom near the 620 level to form a Descending Triangle. During the first week of September, Gold closed below 620 to trigger a sell-off. The depth of the Triangle was 80 (700 to 620) points.

The Dollar Versus Interest Rates and Stocks

The problem with comparing the dollar to bonds and stocks directly, without using commodities, is that it is a shortcut. While doing so may be helpful in furthering understanding of the process, it leaves analysts with the problem of irritating lead times. While analysts may understand the sequence of events, they don't know when trend changes are imminent. As pointed out in Chapter 5, usually the catalyst in the process is a rally or breakdown in the general commodity price level, which is itself often foreshadowed by the trend in the gold market. With these caveats, consider recent market history vis-a-vis the dollar and interest rates.

Relations Between The External And Internal Values Of The Mark After 1918

After the Armistice a new phase in the evolution of the mark was begun. The external value of the German currency fell well below its internal value and remained lower until September 1923. The coefficient of divergence between the exchange rate of the gold mark in terms of paper money and the price parity, which was 1-36 in October 1918, had become 3 -25 in February 1920. This was the highest figure reached by the coefficient of divergence. During this period the index number of American prices rose from 202 to 232 and that of the German paper prices from 233 to 1,685. The theoretical index number of the exchange rate of the gold mark, corresponding to the ratio between the

Why Is This A Good Pattern

The next example of a two-step cluster was found on a daily continuous chart in the gold market (see Figure 8-11). It included a 50 percent retracement of point a to point b, a 1.272 extension of point c to point d, and a 1.0 projection of point b to point c, projected from point d. The zone came in between 456.70 and 457.70.

The most important thing to understand in a currency pair or more precisely in a Forex transaction is that you will be

Australian Dollar - The Australian Dollar was introduced in February 14, 1966, not only replacing the Australian Pound but also introducing a decimal system. Following the introduction of the Australian Dollar in 1966, the value of the national currency continued to be managed in accord with the Bretton Woods gold standard as it had been since 1954. Essentially the value of the Australian Dollar was managed with reference to gold, although in practice the US dollar was used. In 1983, the Australian government floated the Australian dollar, meaning that it no longer managed its value by reference to the US dollar or any other foreign currency. Today the value of the Australian Dollar is managed with almost exclusive reference to domestic measures of value such as the CPI (Consumer Price Index).

The Commodities Connection

Gold price movements are important for currency traders to understand. Gold acts in many ways as a surrogate currency and a safe haven when money moves out of the dollar in response to geopolitical crises. But gold is also a commodity on its own, adding strength or weakness to currencies of countries that produce gold. South Africa, of course, is the leading producer of gold, but its currency, the rand, is not floating, so traders can look to the Australian dollar and the Canadian dollar for trading those currencies when gold patterns provide trading opportunities. Gold price action can also be a misleading guide to the currency trader. In recent years, Gold has attracted a great deal of investment demand from exchange-traded funds (ETFs). In 2003, ETFs were buying 20 tons of gold, and this rose to 500 tons in 2005. The trader who looks at gold prices rising may interpret it as a reaction to the dollar, when it actually can be reacting as a function of investment demand. Figure 5.1...

Leadership and Politics

Everything from a terrorist attack and reprisal must be considered within the big picture. For example, when faced with the daunting task of eliminating or substantially reducing terrorism, the question for the Bush Administration was, Can U.S. action to curb international terrorism strengthen the world's confidence in the dollar or leave it in isolated limbo The answer is inevitably found by examining charts. A move from dollar pricing to euro pricing will alter relative values and change currency parity. Even the possibility of a gold standard is not beyond the realm of possibility.

Monetary Phenomena Observed During The Last Phase Of The Depreciation Of The Mark

A surcharge for the depreciation of the currency (Geldentwertungszuschlag) was officially established in August 1923 on the prices of coal, to guarantee the producers against the losses caused by the depreciation which the currency suffered in the interval between the payment by the consumers and the receipt of the money by the producers. At first this surcharge was calculated in gold marks at 4-15 per ton (price of a ton, 27-95 gold marks). By such means the price of coal was raised to 34 gold marks the increase in the price entailing a corresponding increase in the coal tax. In practice the surcharge proved to be insufficient. That prices contained a high premium against the risk of depreciation was obvious in all those cases where, for the same commodity, there was a different price according to the nature of the means of payment. For example, the manufacturers of rubber goods exacted, on the basic prices fixed in gold marks, a supplement of 50 per cent if payment was made in paper...

Practical Applications

Tions are not limited to single-market inputs. In the case of the VantagePoint T-bond program, for instance, the inputs into the forecast of the moving averages take into consideration the open, high, low, close, volume, and open interest for the past 10 years from actual T-bond contracts during their most actively traded periods, plus nine related markets (T-bond cash, NY Light Crude Oil, CRB Index, deutschemark, US dollar index, Eurodollar, Comex gold, Japanese yen, and S& P 500 Index) that have been determined to have a significant effect on Treasury bonds.

Gold And The Stock Market

Usually when the conversation involves the relative merits of investing in commodities (tangible assets) versus stocks (financial assets), the focus turns to the gold market. The gold market plays a key role in the entire intermarket story. Gold is viewed as a safe haven during times of political and financial upheavals. As a result, stock market investors will flee to the gold market, or gold mining shares, when the stock market is in trouble. Certainly, gold will do especially well relative to stocks during times of high inflation (the 1970s for example), but will underperform stocks in times of declining inflation (most of the 1980s).

Gold Versus The Stock Market From 1982 To 1989 Gold Usually Does Best In An Inflationary Environment And During Bear

The period from 1988 through the middle of 1989 shows stocks and gold trending in opposite directions. This period coincided with general falling commodity prices and a rising dollar. Clearly, the wise place to be was in stocks and not gold. However, the sharp setback in the dollar in mid-1989 gave warning that things might be changing. Sustained weakness in the dollar would not only begin to undermine one of the bullish props under the stock market but would also provide support to the gold market, which benefits from dollar weakness.

Golda Key To Vital Intermarket Links

Since the gold market has a strong inverse link to the dollar, the direction of the gold market plays an important role in inflation expectations. A peak in the dollar in 1985 coincided with a major lowpoint in the gold market. The gold market top in December 1987 coincided with a major bottom in the dollar. The dollar peak in the summer of 1989 coincided with a major low in the gold market. The gold market leads turns in the CRB Index. The CRB Index in turn has a strong inverse relationship with a bond market. And, of course, bonds tend to lead the stock market. Since gold starts to trend upward prior to the CRB Index, it's possible to have arising gold market along with bonds and stocks (1985-1987). A major bottom in the gold market (which usually coincides with an important top in the dollar) is generally a warning that inflation pressures are just starting to build and will in time become bearish for bonds and stocks. A gold market top (which normally accompanies a bottom in the...

An Economic Sophism

The argument on which the pretended demonstration was based is an example of an interesting economic sophism. It admitted that the nominal value of the paper money issued was certainly enormous but the real value, that is the gold value according to the exchange rate, of the mass of notes in circulation, was much lower than that of the money circulating in Germany before the war. For example, on August 7th, 1923, the note-issues amounted to 62,338 milliard paper marks. On the same day a gold mark was worth 783,000 paper marks. The real, intrinsic value of the paper money in circulation was scarcely 80 million gold marks How could it be stated that there was inflation in Germany Before the same Committee Havens,tein, then President of the Reichsbank, explained an analogous notion. He asserted that the cause of the fall of the mark was not the so-called inflation, but that the impulse to monetary depreciation had always come from abroad. In a later discussion on August 25th, 1923,...

Changing Spread Relationships

Is the gold silver ratio a tradable spread Was it ever a good spread trade Probably not. The relationship is mainly dependent on public perception of both items as an enduring store of value. The same is true for the platinum gold ratio (Figure 13-4) or the value of gems. Prices remain strong as long as the public confidence is unshaken. There is no fundamental reason for these prices to remain in the same ratio as there is for feedgrain prices to adjust relative to their protein content.

Gbp Eur Aud Chf Nzd Usd Cad

The British pound made an aggressive comeback from its sluggish 2003-2005 performances as the Bank of England delivered two surprising rate hikes in the second half of the year aimed at containing rapid credit growth and house price appreciation. Gold prices soared to a 26-year high of 735 in May before retreating by year-end, yet still gaining 23 percent. Gold's retreat was a result of midyear nervousness with emerging markets and fears that high interest rates in Japan would reduce global liquidity and weigh on risk appetite. A series of gradual rate hikes by the ECB boosted the euro to the second-highest return ranking position, while the Japanese yen was the biggest loser for two consecutive years as continued rate hikes elsewhere further reduced the attractiveness of the yen. (See Figure 4.16.)

By Barbara Rockefeller

Previously, we had the circular oil-dollar logic the dollar is up because oil is down (on the theory that cheap oil is good for the U.S. economy), or oil is up because the dollar is down. Finally, we have the perennial dollar and gold relationship gold rises when the outlook for the dollar is bleak. Gold is an alternative to money as a store of value, even if it can't be used as a unit of account or a transaction medium (try paying for a quart of milk or a tank of heating oil with a chunk of gold).

The Economic and Financial Foundations of Country Risk Assessment

A major element of country risk revolves around the capacity of the country to generate enough foreign exchange to maintain required levels of imports and service its foreign debt. The analysis is often conducted in terms of domestic and external equilibrium. Domestic equilibrium generally refers to full employment and a certain standard of living or growth in the standard of living. External equilibrium refers to the ex ante equality between the supply and demand of domestic currency on the foreign exchange markets. Because the balance of payments equation is an accounting identity, the ex post supply and demand of domestic currency will always be equal. However, ex ante the two can differ and, if they do, the disequilibrium will be reflected in a change in the exchange rate, if the monetary authority does not intervene, or in a change in foreign reserves, if it does intervene. Where country risk is concerned, the problem is a shortage of foreign exchange. Thus, the intervention...

The Intermarket Roles Of Gold And

In the fall of 1989, surging gold prices (partially the result of a sagging dollar and stock market weakness) sent renewed inflation fears through the financial markets and helped keep a lid on bond prices. Unusually cold weather in December of 1989 pushed oil prices sharply higher (led by heating oil) and caused some real fears in

The Desire To Trade

Bob's response concerning what attracted him to trade is not unusual in terms of what normally attracts traders to the markets. The ability to quintuple his money in 16 months attracted him to the markets. It's interesting to note that since his original big score in the gold market, Bob has been unable to better such gains in unleveraged investments. I have found that this situation is not unusual.

The Establishment of the Federal Reserve

The problems of liquidity crises caused by strict adherence to the gold standard prompted Congress in 1913 to create the Federal Reserve System. The responsibilities of the Fed were to provide an ''elastic currency, which meant that in times of banking crises the Fed would become the lender of last resort. The central bank would provide currency to enable depositors to withdraw their deposits without forcing banks to liquidate loans and other assets. In the long run, money creation by the Fed was constrained by the gold standard since Federal Reserve notes promised to pay a fixed amount of gold, but in the short run, the Federal Reserve was free to create money as long as it did not threaten the convertibility. In fact, the Fed was never given any guidance or criteria by which to determine the right quantity of money. This confusion was aptly described by Milton Friedman in his Monetary History of the United States The Federal Reserve System, therefore, began operations with no...

Figure 431 Frequency distribution of TAT trades showing a spike at the 5000 initial stop and at trades with profit

Many analysts have recognized intermarket relationships, which imply some form of weak cause-and-effect relationship. For example, bond prices decline when inflation is rising, and rising gold prices suggest potentially higher inflation. Therefore, we expect gold prices and bond prices to move in opposite directions (see Figure 4.33). You can also measure inflation with the prices of industrial metals such copper or aluminum. The idea is that increasing economic activity will raise the price of copper, and herald a rise in inflation. Therefore, we expect copper prices and bond prices to move in opposite directions (see Figure 4.34). Other intermarket relationships occur with positive correlation. This means that the prices of some commodities rise and fall together. For example, rising crude oil prices suggest potential inflation, and we should expect gold prices to rise. You can use the currency markets as another good example of correlated markets. Exchange rates reflect long-term...

Figure 434 The general inverse relationship between weekly bond top and copper bottom prices

A second difficulty is that each market has its supply and demand forces, which will often distort the usual intermarket relationships. For example, we would expect copper and gold prices to move up or down at about the same time. However, there have been periods when gold and copper prices have moved in opposite directions (Figure 4.35). Thus, any systems built on intermarket forces will not be correct all the time. Figure 4.35 An example of copper and gold prices moving in opposite directions in late 1994-early 1995. Figure 4.35 An example of copper and gold prices moving in opposite directions in late 1994-early 1995. The gold-bond system, which assumes that bond prices move in the opposite direction of gold prices, is a simple but effective example of how to construct an intermarket trading system. The system assumes that rising gold prices signal potential inflation and thus influence the bond market. We will use a dual moving-average crossover system, using arbitrary 10-day and...

The goldexchange standard

A third illustration of the virtually infinite set of possibilities for expanding credit on a fixed money base is international in character. The gold-exchange standard involved central bank holdings of liquid securities denominated in the British pound, the U.S. dollar, and the German mark as central bank reserve assets along with their holdings of gold. The gold-exchange standard developed before World War I, although this arrangement was long thought to have been a post-World War I development based on the recommendations of the Genoa Conference of 1922 and the Gold Delegation of the League of Nations and pushed hard by Governor Montagu Norman of the Bank of England who sought to increase foreign holdings of British pound securities to provide relief for the British balance of payments.46 The boom in world lending of 1913-1914 was financed by increases in central bank holdings of securities denominated in the British pound, the French franc and the German mark. International...

Differences Of Opinion Between Economists About The Influence Of The Paper Inflation On The Balance Of Trade

Internal prices computed in gold were generally less than gold prices in the world market. (b) But there is an alternative line of argument. The increase of note-issues influences the foreign exchanges before internal prices. Internal gold prices fall below those in the outside world exports are stimulated and imports are discouraged. Hence in countries with a depreciated circulation forces would constantly be in operation tending to produce an active balance of trade, and not a passive one, as would result in the preceding theoretical scheme. As Fanno writes The high cost of foreign exchange in countries with inflation, causes an abnormal contraction of imports and an abnormal expansion of exports.*

Stock Groups And Related Commodities

Gold traders, therefore, should keep an eye on what gold raining shares are doing for early warnings as to the direction the gold market might be taking. Stock traders who are considering the purchase or sale of gold mining shares should also monitor the price of gold.

Relations Between Inflation And The Balance Of Trade In Various Phases Of The Depreciation Of The Mark

Paper prices in the home market increased in the course of a year by 50 per cent (according to the indices of the Central Office of Statistics) and gold prices remained for a long time above those abroad. The first of the two theoretical schemes under consideration was probably applicable in that first phase (taking into account the restrictions due to the war and the economic policy of the time) the disparity between home and foreign prices stimulated importsf and together with other causes contributed to the disequilibrium of the balance of trade.

Cold Versus Gold Mining Shares

The intermarket analysis of stock groups will begin with the gold market. This is a logical point to start because of the key role played by the gold market in intermarket analysis. To briefly recap some points made earlier regarding the importance of gold, the gold market usually trends in the opposite direction of the U.S. dollar the gold market is a leading indicator of the CRB Index gold is viewed as a leading indicator of inflation gold is also viewed as a safe haven in times of political and financial turmoil. for clues. Nowhere is that more evident than in the relationship between the price of gold itself and gold mining shares. As a rule, they both trend in the same direction. When they begin to diverge from one another, an early warning is being given that the trend may be changing. Usually one will lead the other at important turning points. Knowing what is happening in the leader provides valuable information for the laggard. Many people assume that commodity prices, being...

Frequency Distributions

If we remember the qualities of a standard deviation when measuring price distribution, it assumes a symmetric pattern therefore, a simpler frequency distribution can be used to provide a more convenient representation of price distribution. The frequency distribution makes no assumptions about the shape of the curve, but records the amount of time that prices remained within a specified range. For example, if we look at the history of gold from 1976 through 1993 (see the bold line in Figure 18-2), prices have varied from 100 per ounce in 1976 to 675 per ounce in 1980. Because the first 3 years would lower the average, we will consider only the period from 1979 through 1993, which had alow of 228. Dividing the price range into 20 parts, we get bars of 23.60. Accumulating the history of monthly closing prices into the 20 slots from 227.60 to 251.20, 251.21 to 274.80, and so forth, we get a frequency distribution spanning the full range of gold prices, each bar indicating the number of...

Amid The Strengths There Are Issues Of Concern

With high short-term interest rates already costing 13 and approaching 14 (on debt of over 3 billion) a huge and growing current account deficit (over 2 billion), a potential housing bubble and huge private debts, there is considerable reason for concern. On the positive side, Iceland has low and decreasing levels of government debt, a fiscal surplus, foreign exchange and gold reserves of 1 billion, and a fully funded pension plan.

Gold As A Diversifier

Figure 8.1 demonstrates why gold is such a helpful diversifier when you compare the correlation between gold, on the one hand, and various asset classes on the other. Gold is negatively correlated with most other asset classes. For example, whenever long-term bonds decline, there is a tendency for gold prices to go up. Whenever equities decline, there is an even greater tendency for gold prices to go up. strength in the stock market and weakness in the gold price in the last half of the 1990s, many portfolio managers had reason to question what role, if any, gold could play in a portfolio's performance. Historically, however, they could look at the levels of each market and quickly conclude that the stock market was at an unusually high level and that the gold price, in contrast, was unusually low with an upside potential perceived to be greater than the downside potential. Figure 8.3 captures these two developments high stock prices and low gold prices. The key questions for...

STEP 4 LOOP 2 Perform Regression Test of InSample Results against Prototype

The quality of the trading investment system will be appraised by a collection of regression tests that evaluate one or more of its features. A valid regression test of insample results will generate the verified gold standard results. Regression tests data and the gold standard results should be packaged into a regression test suite. As development progresses and more tests are added, new results from in-sample and out-of-sample tests can be compared with the gold standard results. If they differ, then a potential flaw has been found in the system.

SPC Outputs and Shadow Trade

In this step, the product team performs regression testing of all the performance metrics against the in-sample, gold standard test results. The performance metrics should be similar and the degree of similarity will indicate if the environment is currently favorable for this algorithm. Let us suppose, however, that you produce an algorithm that works well in sample, but that has a clear economic cycle to it. You run the out-of-sample test, and you see that the economic cycle is becoming unfavorable the out-of-sample results show a shift in performance versus the in-sample results. This could lead to a parking of the system at the next stage gate or at least a frank discussion of risk with management. The reverse situation is that the environment is becoming more favorable for the system, which should prompt management to release resources more quickly to bring the system online.

The Influence Of The Depreciation Of The Mark On Prices Of Exported Goods

This system of the sliding scale was applied in many different ways. The price often resulted from two factors, one of which was the basic price and the other a coefficient (the so-called key) varying according to a combination of determinate elements wages, price of raw materials, exchange rate, etc. Sometimes the total price was formed from two elements the cost of raw materials, which was calculated in foreign money, and internal expenses incurred in paper marks. At last, some time later, exporters, almost universally, gave up fixing sale prices in paper marks. They stabilized them thenceforward in an appreciated foreign currency (dollar, pound sterling, Dutch florin, Swiss franc) or even in gold marks. 19. Curve AB (Diagram xiv) shows the foreign demand for German goods. Along the Y axis are measured gold prices of a bale of German exported goods (in Marshall's sense) CD is the supply curve of German products, supposing supply prices computed in gold. Consequently, the gold price...

Certain Statistics Of Export Prices

Sold their grain at gold prices which were below those of the world market. That, concluded Wagner, constituted a loss for the Russian economy, which in that way made a present of part of its production to foreign countries, although the exporters continued to make a profit. The table on p. 248 shows the average prices in gold marks of a quintal of goods exported from Germany in the various months of 1919, 1920, 1921, and 1922. The figures in paper marks which appear in the sources (publications of the Statistical Bureau) have been converted into gold marks by reference to the monthly average rate quoted for the dollar on the Berlin Bourse. which the dollar rate rose rapidly (average rate 12-8 paper marks in May 1919 99-1 paper marks in the following February), the average gold price of a quintal of exports decreased sharply, to 9 6 gold marks in the month of maximum divergence between the internal and external values of the paper mark. improvement in the paper mark (average rate for...

Controlling the Risk Factors

For financial market risk, we can rely on the rich literature and models of modern portfolio theory. Although financial market risk cannot be completely eliminated, investors can take advantage of the diversification benefits of various investments by following long-term asset-allocation policies. Some investors may decide to take on more financial risk hoping to gain more return, if they can tolerate the risk. They can accomplish this by selecting a more aggressive asset-allocation policy (typically consisting of more stocks). The Markowitz mean-variance model is widely accepted as the gold standard for asset allocation. Unfortunately, this framework considers only the risk and return trade-off in the financial market. It does not consider the longevity risk people face during retirement. To fill this gap, we focus our attention on the importance of longevity insurance while discussing the problems with fixed- and variable-payout annuities and then move on to address the proper asset...

The Fall In The Prices Of Industrial Shares In 1922

In the second half of 1922, after the relative stability of the first months of that year, the depreciation of the currency proceeded with great rapidity. On an average the gold mark was worth 76 paper marks in June, 117 in July, 758 in October. The prices of shares followed only some way after the movement of the dollar exchange rate and of prices. The index number in paper was 8-2 in June (1913 1) and 20-6 in October. When the paper index number is converted into gold terms, according to the exchange rate of the dollar, the index number for October 1922 is 2-72 (1913 100). Based on wholesale and retail prices we have the indices 3-64 and 9-34.* Million gold marks

Natural Resource Options

In a natural resource investment, the underlying asset is the natural resource and the value of the asset is based upon the estimated quantity and the price of the resource. Thus, in a gold mine, the underlying asset is the value of the estimated gold reserves in the mine, based upon the price of gold. In most such investments, there is an initial cost associated with developing the resource the difference between the value of the estimated reserves and the cost of the development is the profit to the owner of the resource (see Figure 12.3). Defining the cost of development as X and the estimated value of the resource as V makes the potential payoffs on a natural resource option the following