Pound Sterling Hits 12 Year Low. Here's What We Recommend

Well, well, well!

Mervyn King has changed his tune. The Bank of England Governor has been at pains this year to show how serious he is about inflation. Those of us who read the Monetary Policy Committee (MPC) minutes felt we knew which side of the hawk-dove divide King was on.

But things change. Economic headwinds blow harder. Dire situations get direr. And the pound hit a 12 year low yesterday. We were prepared for that, though...

In a moment, I’ll tell you what we did — and what you need to do to protect against further falls in sterling. But first, let’s take in the news from Threadneedle Street...

I predicted in June that the next interest rate move would be up, not down. But in yesterday’s Quarterly Inflation Report, King dropped a heavy hint that — despite inflation hitting 4.4% - the Bank may actually prefer to cut them instead.

I can see why. Inflation, as I wrote yesterday, looks like it will hit a peak in the next few months. World commodities prices are falling.

The UK economy, meanwhile, continues its march towards recession. Yesterday’s unemployment figures show unemployment rising at its fastest rate for 16 years. An extra 20,100 people joined the jobless ranks last month.

The Bank has slashed its growth forecasts. The general expectation, therefore, is that the MPC will hold rates steady for a bit, then look to cut them as soon as it reasonably can.

Unsurprisingly, the currency markets reacted to this new stance by selling the pound. It fell against both the dollar and the euro. The sterling trade-weighted index — which measures the pound against a basket of currencies — dropped 1.8% to 90.8 points. This is the index’s lowest level since December 1996.

I believe worse is to come for the pound. Most British investors have exclusively pound-denominated portfolios. A sensible course of action, therefore, is to hedge against further sterling falls.

That’s exactly what I told Fleet Street Letter readers to do on Saturday. The investment we recommended rose yesterday as the pound fell.

As I mentioned on Tuesday, we’re playing this through the euro. It’s not a pure currency trade — our investment gives you a steady income as well. Many commentators are saying the euro is overvalued right now. I addressed these concerns on Tuesday's article, Two Investments To Make For The Recession, and I believe this is an investment worth holding.

To find out more, you need to be a Fleet Street Letter reader. Become one today, and your welcome pack will include the most recent issue (Saturday’s). This will tell you what you need to know about our chosen sterling hedge.

Here’s what you need to do, before the pound falls any further.

Why British investors don’t buy silver

It’s Thursday, so we’re answering your investment questions. If you have an investment-related question, send it in. The email address is askfleetstreet@fspinvest.co.uk

Here’s today’s selection:

Q: A lot is said about buying silver. How on earth do you do so in the UK? Gold is relatively easy. But silver? — RC

A: I passed this on to our sector expert Garry White, editor of Smart Commodities

Says Garry:

"There is a major difference between gold and silver. You have to pay VAT on silver bullion purchases in the UK, but you do not pay anything on gold purchases.

"This wipes out silver bullion’s value as an investment for UK residents.

"Why buy silver bars and pay 17.5% to the taxman, when you can buy gold bullion and the taxman has to buy his own lunch? That’s why it’s difficult to buy silver bullion as an investment here. There is simply no demand.

"The best way to invest in silver is therefore via an exchange traded commodity (ETC) provider. It takes away the VAT problem. An example would be www.etfsecurities.com. There are others on the market too, so you should shop around."

Q: I have recently been doing a bit of spread betting and I was looking into basic charting as a tool to give some degree of guidance. Can you recommend or give guidance on some basic charting, which might help with short to mid term spread betting? — RJ

A: As editor of The Fleet Street Letter, I am a staunch fundamentalist. So is Theo Casey, our investment director. We have to get a solid, bottom-up measure of a company before we even think of putting money in.

But... Theo has a secret from his past. His answer to this question reveals that our investment director wasn’t always the clean-cut fundamentals man he is today... Here’s Theo’s answer:

"I’ve spent quite some time chart-gazing as I used to work on a trading service.

"There are hundreds of systems and strategies that can, at times, provide quite contradictory signals. It can all be a bit overwhelming.

"But the first thing you need to think about when trading short-term is nothing to do with Elliott Wave Theorem, Fibonacci or any other convoluted strategy.

"Any good trade begins with the basics, price and volume.

"Price: The levels at which the investment is trading. Is it over-valued or undervalued? Fundamental investors measure value through metrics like the P/E (price-to-earnings) ratio. The technical investor’s value tool is the moving average. It’s basically the average of the previous closing prices rounded up over any length of days.

"If a stock is rising above its long-run moving average, beware of a potential pull back (otherwise known as mean-reversion).

"Volume: Volume is the amount of shares changing hands. If there are very few trades being made in a stock or index, or it is illiquid, the price could be set for a fall.

"If a stock is rising with low levels of shares trading hands (volume), again, look out for mean-reversion.

"The price and the volume should be confirming the trade you intend to take. If a share is flying high but no one is buying it, it could fall hard.

"Take a look at the FTSE 100 in early May for an example. The index traded as high as 6,300. But one market maker said at the time: "I thought it was Christmas day, volumes are just so low." The index was also trading significantly above the long-term (200 day) moving average.

"What soon followed, as we all remember, was an almighty pull-back. The beginnings of the official bear market.

"When buying short-term investments, we ideally want a stock that has a consistent level of volume and is trading above its major moving averages. However, if that stock is over-extended — trading very far above those averages — beware for a pull-back."

Thanks Theo. I know that some readers are very interested in technical analysis (or ‘charting’). So I had a word with our products man Darren Hughes.

"You got anything for someone interested in technical analysis?" I asked.

"Yeah," he said. "But only for the right people."

"What do you mean?"

"Well," he said. "This is only for people who are comfortable trading the stock market. It’s not for newcomers. Also, as you know, virtually every product and service we offer has our standard money back guarantee. Try it, see if you like it, and if you don’t you can have a refund."

"But this one doesn’t?"

"This one doesn’t. People are buying it because they like the system and they see that it makes money. But... once you’re in, you’re in. You have to be the right kind of person."

The system Darren showed me is something called the ‘Pure Matrix’. And while you don’t need to be a world’s expert on stocks (the Pure Matrix teaches you what you need to know), you do need some experience.

Find if you’re the right kind of person for this — as well as how much this system could make you...

Until tomorrow

Ben Traynor

Editor

Today’s selected articles:

Garry White on why Prince Charles should keep his opinions — and his pies — to himself.

Theo Casey on investing in recession.

The Daily Reckoning - Financial Markets — More complex than a Dostoevsky novel

The trouble with following the financial news is that there is so much of it. Every day brings new information, new facts, new theories — dozens of them. The financial news becomes like a dense Russian novel, with so many characters coming and going that we forget the plot.

Of course, if you’re reading Dostoevsky this summer, you can always stop, flip back and figure out what is going on. In the financial markets you can never stop. The news just keeps coming...the absurd characters keep popping up...the intrigues and sub-plots get denser and more confused.

And yet, it’s in the financial markets that the plot really matters.

You can read the Daily Reckoning in full here.

P.S. If you enjoyed this article you can find out more about our free email, The Right Side by clicking here.

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Pound Sterling Hits 12 Year Low. Here's What We Recommend

Pound Hits 12 Year Low. Here's What We Recommend