October 2nd, 2008

SLV, GLD, FXE and FXB: A Costly Mystery and Mistake

If you’ve been a reader since the beginning of the year, you know that I’ve consistently been encouraging liquidating your positions and holding cash. I’ve also encouraged you to hedge the remainder of your holdings (or to capitalize on the market implosion) with positions in the various Index-linked PowerShares Ultrashort ETFs.

However, I have to apologize for one extremely disappointing and, for me, costly and unprofitable trade: the purchase of precious metals and foreign currency ETFs. What can I say other than to tell you that it’s cost me dearly, too.

Ever since around July 17, these have all been in a free fall. On that day, Ben Bernanke, the Chairman of the Federal Reserve, assured the United States House of Representatives Financial Services Committee that giant mortgage companies Fannie Mae and Freddie Mac were in “no danger of failing.” Is there a connection? I don’t know.

Look at these charts:

  • Silver
  • Gold
  • Euro
  • British Pound

It’s said that you can’t hope to bat a thousand when it comes to the market. And they say that if you cut your losses, you’ll survive to play another day. It’s been a suprising, bewildering and disastrous trade. I’ve learned some lessons that I hope never to have to use.

Every one of these securities is behaving contrary to every economics book and everyone’s expectations. Anyone have any explantions for this behavior? Any ideas of where it’s headed?

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