This started with me thinking about the risk the dollar is going to go down long term given that we are printing money at HUGE annual clips. Like 23% of all dollars in existence were printed last year. That is NUTS. And apparently no plan to slow down the printing. So I want to buy currencies to try and profit from the dollar devaluation. But I don't want to go too far out on a limb as who knows, I could be wrong. So I want to hedge myself. I want to short currencies that might be printing money even faster than we are printing money. In my mind, while I know a TON of things can affect currency pricing, in the long run, if one company is printing money at a 23% annual clip, and experiencing 3% growth in inflation-adjusted GDP year over year, and another is printing money at a 3% annual clip, and experiencing 2.5% growth in inflation-adjusted GDP year over year, in the very long term the second one is going to have to appreciate versus the first one. I always look at the U.S. dollar versus Mexican peso, only because its the one whose pricing I've been aware of at all over a long period. When I first went to Mexico in the early 90s, it was around 7 pesos to the dollar. And I remember someone telling me it had previously been like 4 pesos to the dollar. Then when I went back on vacation a few years later it was 10 pesos to the dollar. Then another vacation, 12, then another, 14, then another, 20. It was a prime example I think of one currency going up in value against another one long term, because I bet Mexico was printing money as a far higher annual clip than the U.S., almost year after year. So what I want to do is try and figure out the currencies where the government is not printing money but that are expected to have a decent economy. I would focus on say 5 of those. Each [week] I would put in $X amount into one of those currencies, swapping out which currency every week. So I'd never buy a currency more than once every [5 weeks]. I would be dollar cost averaging in, nice and slow, to avoid getting hit with any freight trains. Now, to hedge myself a bit in case the dollar did come on strong, I would put $X amount into currencies where it looks like the new printed money/expected growth ratio is much higher than the U.S. I would buy the dollars versus those currencies, say 5 of them, again buying a different one every [week] to dollar cost average in and avoid getting my head taken off by huge trends. Then I would slowly increase my [weekly] buy ins. So it it was $100 one week, the next week it might be $101. Then the next week $102. Etc. etc. leveraging up my strategy slowly over time again to make more profits but minimize the risk of my head being taken off. Thoughts? This is the culmination of all my thought powers after many years of deliberation. I hope it sounds like a decent plan!!!! Thanks.
Great strategy I think it's definitely worth to try but keep an eye on risk, avoid deep drawdowns and unexpected losses. Also use hedging where possible, buy the risk that you intend to take and avoid unnecessary.
Currencies are one investment that literally not a single person in the world can evaluate long-term. Whereas its inevitable that the Dow Jones Industrial Average will be higher long-term.
Thanks sef88. Why is that? I was looking at Oanda live spreads the other day. The spreads look like they are two what I understand are called "pips". So a U.S. dollar against some other currency might be 1.8884 bid 1.8886 ask. If you buy you have to get the ask, sell get the bid. So that 2 pip difference is almost nothing, a very, very small percentage. And I understand that is all you are paying - no commission on top of that. Am I missing something? I don't see how futures could be much lower than that, or if they were why one would even care because the extra "cost" you are paying via the spread seems almost nothing.
I don't know if anything is truly "inevitable", but from what I understand is unlike the DJIA, which tends to have real value (the underlying businesses) that grow over time, and thus have an growing intrinsic value over the long run, currencies do not, and unlike investing in equity investing in currencies or currency futures is a zero-sum gain. I get that. I just don't see how if two economies are going at the same rate but one is printing 3% more currency annually buy another 30% more currency annually, and there appends to be no end in site of this, the forger can't appreciate against the latter in the long run. Look at the Argentine Peso versus the dollar (or pretty much anything else). Argentina has populists in control and they are printing money left and right. Its getting crushed against the dollar. Even if they CUT BACK a good bit, they are still going to be printing a ton more currency versus the dollar. How can it realistically not keep going down versus the dollar in the long run?
Although, can one even trade the Argentine Peso? Maybe not, not seeing it at Oanda. I guess everyone realizes what I'm saying so no one in their right mind would buy the Peso versus anything else?
Just thinking from perspective of shorting a currency and you incur a negative balance in interactive brokers. Then you would have to pay overnight interest. Whereas for futures, you don't have to pay if there's no change in spot.
Q BMW........... Thanks sef. Do you know where I can find those rates? Or what they are called so I can look into them? But whatever they are, should they not be priced into the futures contracts? Thanks!!!