This morning the Bank of International Settlements released its Triennial FX survey which is basically the market’s benchmark for forex volume and turnover. To no one’s surprise, volume has surged over the past 3 years. Between April 2007 and April 2010, global foreign exchange market increased by 20 percent from $3.3 trillion to $4.0 trillion, which is now the golden number for forex volume.

Reading between the lines, we can tell that a large part of the increase in volume is due to the trading activities of RETAIL traders! (Yes, we are making a BIG difference) According to the BIS report, 48% of the growth was in spot transactions which represents 37% of the total turnover (or total FX flow). Although swaps became more popular to trade, all other related foreign exchange instruments saw only a 7 percent increase in volume. The report also says that “the higher global foreign exchange market turnover is associated with the increased trading activity of “other financial institutions” (think retail forex brokers). Turnover in this category rose 42% and for the first time ever, reporting dealers (banks) did more transactions with “other financial institutions” than with other banks.

Having just come back from Singapore where shelves and shelves were filled with forex trading books, I am in no way surprised that the BIS has confirmed the popularity of forex trading.

The foreign exchange market also became more global with cross-border transactions representing 65% of trading activity in April 2010, while local transactions account for 35%.

U.S. Dollar Becoming Less Important

Back in 2001, the U.S. dollar was involved in 90% of all currency transactions and as of April 2010, this fell to 84.9%. The decline in trading of dollars has benefited the euro, which gained 2 percentage points in market share since the last survey and accounts for 39% of all transactions. “The Japanese yen also increased its market share by 2 percentage points to 19%, a recovery relative to the 2007 survey but still below its peak of 23.5% reached in 2001. The pound sterling gave up most of its post-euro gains, with its share returning to the immediate post-euro level of around 13%. Trading in the Swiss franc also declined marginally to 6.4% from 6.8% in April 2007. The Australian and Canadian dollars both increased their share by around 1 percentage point, to 7.6% and 5.3%, respectively.”

“The percentage share of the US dollar has continued its slow decline witnessed since the April 2001 survey, while the euro and the Japanese yen gained relative to April 2007. Among the 10 most actively traded currencies, the Australian and Canadian dollars both increased market share, while the pound sterling and the Swiss franc lost ground. The market share of emerging market currencies increased, with the biggest gains for the Turkish lira and the Korean won.”

Of the major currency pairs, trading of EUR/USD and USD/JPY have increased while trading of the GBP/USD has decreased.

The U.K. is still the largest trading center for forex but the relative ranking of foreign exchange trading centres has changed slightly from the previous survey. The United Kingdom continued to be the most active location with a share of 46% of worldwide trading, followed by the United States with a share of 24%, slightly down from 2007. Outside these two centres, trading took place primarily in France (7%) and Japan (3%), both slightly down from 2007, Singapore (3%) and Switzerland (3%), both slightly up. Turnover in Germany almost halved to less than 2% in April 2010 compared with 2007. Banks located in the United Kingdom accounted for 36.7%, against 34.6% in 2007, of all foreign exchange market turnover, followed by the United States (18%), Japan (6%), Singapore (5%), Switzerland (5%), Hong Kong SAR (5%) and Australia (4%).

Lower Forex Margin Should Temper Volume Increases in the Future

However the pace of growth will most likely be moderated by the reduction in leverage announced in the U.S. and Japan. Last month, Japan reduced leverage to 50:1 and plans to bring this down even further to 25:1 next year. U.S. regulators announced earlier this week that leverage will be capped at to 50:1 for major currencies and 20:1 for all other currencies. This will go into effect on October 18. Lower leverage will make forex trading less attractive to some participants but 50:1 is still very generous leverage by all counts and so it will not be catastrophic for the retail forex industry. We should still see retail trading contribute positively to forex volume, but probably not by the double digit levels seen in past years.

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I was on Fox Business earlier today talking about my outlook for the US Dollar:

Watch the latest video at video.foxbusiness.com

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The Daily Reckoning

The US markets fell 1.5% last night after rallying a similar amount the previous session. This is a clear indicator of a market in trouble.

The market rejoiced on Friday night after the US GDP figures came in at a better than expected 1.6%. The market ignored the fact that the expectations for the figure had to be ratcheted down twice from 2.5% to 1.4% recently so that they could come in under the released figure.

Looking forward, the expectations are that 3rd quarter GDP will be in the neighbourhood of 2.5%. What a joke. I would not be surprised at all to see the 3rd quarter return to negative growth and that would mean that current top down forecasts are ridiculously high.

As Mike Shedlock points out in his global economic analysis blog, at this stage of a recovery, four quarters following a bottom in GDP, growth is usually running at a 6% annualised pace. Instead the US is limping along at a 1.6% pace after 5% real GDP growth in the fourth quarter of last year and 3.7% in Q1. Join the dots and it is quite clear that the US economy is approaching stall speed.

Technically, last night’s fall in the market is a clear warning signal that the previous session’s strength was purely short covering and a misguided interpretation of the GDP figures.

Click here to enlarge

If you have a look at this chart of the S+P 500 you can see that we are approaching the bottom of the range from the past year. The short, intermediate and long term trends are all pointing down now and we have already soaked up a lot of buying support over the past four months to keep us above this key 1010-1040 area.

You can see that the current short term trend is hugging the 10 day Moving average at the moment showing that we are in strong downtrend. A failure under this 1010-1040 area is going to see not only the capitulation of stale bulls from the past four months, but also capitulation from all of the long and wrong positions of the past year.

This will be the moment when no one can deny that the rally of the past year and a half is dead and buried and that the secular bear market that we have actually been in since 2000 is continuing. This is despite the US government and Ben Bernanke and his cohorts throwing everything including the kitchen sink at the problem.

Memories of the crash are still fresh in people’s minds and it will not take much to see the panic take hold again. I would expect to see a fairly quick move towards the low 900′s in the S+P 500 from here if 1010-1040 can’t hold. By quick I mean within the next few months.

Friday sees the release of the Employment figures in the states and if the recent figures are anything to go by it will not show any pick up in employment which is a necessary catalyst for an improvement in the economy.

The bond market is showing signs that it thinks the US is already in another recession. The Japanese Yen is going through the roof and is showing that big investors are repatriating funds and lowering their risk exposure.

It appears that the equity market is sitting on its own as being optimistic about the future prospects of the economy. I don’t think it is long until that shoe drops as well.

I would be even so bold as to say that last night price action has set the market up for another steep fall in the next day or so. Below 1040 in the S+P 500 is a danger zone and I think this time the moons are aligned for the market to retreat from the maginot line at 1040 and scurry off into the bushes.

I have been sending out warning signals to my Slipstream and Swarm subscribers and I invite you to have a look at a weekly video that I send outlining the major world markets and where I see them heading based on my technical indicators. I am very protective of my subscriber’s interests and showing this information for free will not become a regular event, but I think it is ok to give you a quick look under the hood.

Click on the image below to watch the Slipstream Trader market update:

Murray Dawes
Editor, Slipstream Trader
for The Daily Reckoning Australia

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The Daily Reckoning

“Should I buy gold now, or wait for a pullback?”

I get that question a lot…and it’s a valid question. For nearly two years, gold hasn’t had a serious decline. There have been pullbacks, of course, but nothing assumption-challenging. In fact, since October 2008, gold’s largest price drop is 10.6% (based on London PM fix prices), and yet the average of all declines since 2001 is 13% (of those greater than 5%). The biggest pullback we’ve seen this summer is 8.2%. Technically the summer’s not over, but I’ll admit I’m surprised we haven’t had a better buying opportunity.

So, is now the time to buy? It depends on your honest answer to another question: “Do you own enough gold?” By “enough” I mean an amount that lends meaningful protection on your assets. By “meaningful” I mean that no matter what happens next – another financial blow-up, accelerating inflation, crushing deflation, war, a plummeting dollar, more reckless government spending – you won’t worry about your investments.

Whether you should buy now is almost irrelevant if you don’t already own a meaningful amount of gold. If you earn $50,000 a year, how is one gold Eagle coin going to protect you if the dollar plummets and sends inflation soaring? If your investable assets total $100,000, is your nest egg sufficiently protected owning two gold Maple Leafs? This is all akin to buying a $50,000 insurance policy for a $500,000 home.

Today we face the prospect of prolonged economic stagnation, and most governments are administering grossly abusive monetary policy as a remedy. While some of the consequences are already being felt, the full ramifications have not hit your wallet yet. But they will.

If you don’t have at least 10% of your investable assets in physical gold, or at least two months of living expenses, you have your answer: Buy. Don’t use leverage, don’t borrow money, and don’t buy with reckless abandon, but yes, get your asset insurance policy and tuck it away. And then start working toward 20% (we recommend a third of assets be in various forms of gold in Casey’s Gold & Resource Report).

Back to the original question: should we buy now, or wait for a pullback?

The answer comes when you look at the big picture. If you pull up a 9- year chart of gold, what sticks out is that the price is near its all- time nominal high. One could be forgiven for thinking it looks toppy or at least ripe for a pullback. But I assert that the highs for gold have yet to be charted.

What will a gold chart look like after adding five years to it?

When projecting gold’s potential price peak, there are many ways to measure it. Conservatively, gold reaching its inflation-adjusted 1980 high would have it topping around $2,400 an ounce. More radically, if the US tried to cover its cumulative foreign trade deficit with its current gold holdings, gold would need to hit about $32,000/oz.

Let’s take something more middle of the road, and apply the same trough-to-peak percentage advance gold underwent in the 1970s. (I think there’s a greater than 50/50 chance it does more than that, given the precarious nature of the US dollar). Gold rose from $35 in 1970 to $850 in 1980, a factor of 24.28. Our price bottomed in 2001 at $255.95; multiply that by 24.28 and you get a gold price of $6,214 per ounce.

Sound too high? Well, would it feel high if you had to pay $12.50 for a Big Mac? At $3.39 today at my local McDonald’s, that’s about what it would cost ten years from now if we get the same rate of inflation we had in the late 1970s.

So if gold hits $6,214, what might it look like on a chart if you bought today around $1,200?

I’m not saying there won’t be pullbacks or that you shouldn’t try to buy at lower prices. Just keep a big-picture perspective. Let’s say gold falls to $1,100 and you’re kicking yourself for having bought at $1,200…if gold reaches $6,200 an ounce, the profit difference between buying at $1,200 and buying at $1,100 is only 1.6%. If gold gets whacked to $1,000 (at which point I’ll be buying with both hands) the difference is still only 3.2%.

Heck, even if gold peaks at $2,400, you still get a double from current levels. (But unless government monetary policies immediately reverse course, gold isn’t stopping at $2,400.)

So there’s my answer. Yes, you have to accept my projection of gold’s ultimate price plateau. And you have to sell at some point to realize the profit. But if the final chapter of this bull market looks anything like the chart above, I don’t think you’ll be too upset having bought at $1,200.

Regards,

Jeff Clark
for The Daily Reckoning Australia

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Crude oil prices were a bit higher Thursday as the US dollar weakened and as new jobless claims in the United States were reported lower last week. The US Labor Department reported that there were 31,000 fewer new filings for unemployment benefits last week, to 473,000 new claims, the first decline in a month. In [...]

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The Daily Reckoning

As Wall Street’s big money players return from the Hamptons in the coming weeks, they will have to reassess the earnings power of their portfolio companies. Last week, Staples confirmed the message we heard from Office Depot and Office Max: the small business sector as a whole isn’t very healthy. Disappointing earnings from Dell dampen the mood even further.

The recent economic data adds to the case that the economy is slowing rapidly. It turns out that Obama stimulus plans didn’t stimulate much of anything except the budget deficit.

Yet despite all we’ve been through, most policymakers and commentators remain confused and frustrated because they’ve misdiagnosed the root causes of the financial crisis. The seeds of today’s economy were sown in the credit bubble of 2000s, which, thanks to government policies and central banks, grew far bigger than it ever could have grown if a free market truly existed.

We’ll hear a lot more from policymakers about how the economy is approaching “stall speed,” implying that it needs another shot of stimulus fuel. They haven’t taken the time to consider how the original stimulus plan might have undermined the economy’s foundational strength. The economy is not a machine to be tinkered with, but a complex, uncontrollable entity that seeks to allocate capital to its most needed uses.

The endless stream of Washington’s tone-deaf policies makes it almost impossible to plan. Growing regulatory burdens for small businesses is a huge problem for the labor market. I’ve heard from a half dozen sources in the past few weeks about soaring premiums as health insurance plans come up for renewal. Thanks to the mandates in the newly signed healthcare law, premiums will keep rising. The law had the effect of increasing the cost of hiring new employees, so we shouldn’t be surprised that layoffs still exceeding new hiring – even this far into “the recovery.”

As much as I’d prefer a return to smaller government – for the sake of our economy’s long-run health and competitiveness – here’s what I expect to happen: further weakness in GDP, employment, and the stock market will reduce the political momentum behind fiscal responsibility, and sometime in 2011, we’ll have another stimulus plan. Maybe it’ll come in the form of extension of the Bush tax cuts, with a political compromise resulting in rebate checks or payroll tax holidays for working class voters who aren’t paying much, if any tax as it is.

Perhaps, as a flanking maneuver in its war on deflation, the Fed will finance these checks with the printing press. Further quantitative easing in the bond markets to suppress the long end of the yield curve is nothing but a giveaway to the big banks’ trading desks and a subsidy for government borrowing costs. So the Fed is probably thinking about ways to more effectively get newly printed money into the hands of consumers. But the Fed needs to be very careful about such novel, creative ways to steal from savers. It could spark a crash in confidence in the US dollar. It’s a giant game of chicken, and it’s dangerous.

But I doubt there will be much political support for these tactics until conditions in risk assets – stocks, corporate bonds, and housing prices – get much worse. I doubt that the average voter realizes what the economy would look like without the federal deficit running continuously at 10% of GDP, like it will this year. On the other hand, a slashed deficit would be extremely painful for every single household and business – even those that have behaved responsibly – because it would translate into less business sales, less desire to hire, and lower household income.

This is why you shouldn’t get the economy addicted to harebrained schemes cooked up by economics professors in the first place. The professors espousing Keynesian stimulus are like street corner drug dealers, and they have the economy hooked to their product: stimulus injections.

As a result, the economy is still unable to produce legitimate economic growth or sustainable job creation. US stocks remain a very risky asset.

Dan Amoss,
for The Daily Reckoning Australia

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A fresh surge in the value of the yen brought the Japanese currency nearer to the 84 mark against the US dollar (a fifteen-year high of 84.17 was recorded overnight) and a further step closer to direct currency market intervention. The operative words used to jawbone against these gains were no longer “undesirable” or “worrisome” but more like “grave concern.

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Crude oil prices were lower again Monday after the US dollar strengthened and most US equities markets moved very little, and after crude opened higher on hopes that recent mergers rumors and activity meant that economic conditions were improving. October contracts for West Texas Intermediate crude had dropped 86 cents to $72.96 per barrel in [...]

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Crude oil prices fell again Friday, to its lowest level in six weeks, as the US dollar strengthened, global equities markets saw declines and investors continued to worry about the state of recovery from the recession. September contracts for West Texas Intermediate crude was down $1.09 to $73.34 per barrel in afternoon trade on the [...]

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Sell in the morning, buy in the afternoon. What actually changed in the world? In the markets?
Heard it all by now:
“Must have been that scary North Korean MIG crashing in China.”
Sure was not Blago getting off easy.
Sure was not Bolton (who asked him???) opining that Israel MUST strike within a week, if at all, in Iran.
Sure was not the 5 point (!) drop in the Dow.
Sure was not the 0.08 ‘fall’ in the US dollar.
Or the $1 drop in crude.
Translation: When you run out of reasons, look to …

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