FX Strategy for a troubled World

We haven’t mentioned Mr Eric Sprott yet in our weekly Friday Fundamentalist take on global FX markets however this week we rectify that. For readers who are unaware of Sprott he is a Canadian Hedge Fund Manager with around $10 Billion in funds under management who has been and continues to be a massive bear on the global economic outlook.

His bearish view has led him into the “safety” of gold and silver. The funds he manages own literally billions of dollars worth of these precious metals and what’s more he sees a shiny bright and profitable future for these tangible assets.

Sprott provided some great quotes in one of his recent monthly letters including one from Milton Friedman (who the team at FX Strategy wrote about recently) which I though I’d share with you:

 

“US Dollars have value because everybody thinks they have value. Everybody thinks they have value because in everybody’s experience they have had value”

–         Nobel laureate Milton Friedman

In a nutshell, Sprott thinks the world economy is basically stuffed and that fiat money is going to decrease in value. As this graph shows there is some evidence backing up his case!

So what does this all mean for FX Strategists? Well of course that depends on your own personal views and research. However there is potentially some exciting positions to take in FX markets if Sprott’s bearish view of the world plays out. For example – if real assets such as gold, silver mines, oil, drilling & mining infrastructure companies are the future growth assets as Sprott predicts then people are going to need currency to purchase these things. We don’t see them paying for hard assets with seashells any time soon! So while numerous currencies (such as Yen, USD, Swiss Franc, GBP) would likely devalue under Sprott’s scenario there could be a major boost in demand for currencies leveraged to hard assets.

Take a look at how many gold mining companies are listed on the Canadian and Australian stock exchanges and think about how the demand for CAD and AUD could be boosted in a flight to hard assets.

The so called “risk on” currencies would become the “risk off” currencies as well!!