How To Hedge On Foreign Currencies & Commodities

[Tired of Waiting]

Hello, I need some advice please.

As the government is delaying the HPC, we will have to invest our deposits for many months, or even a few years. It seems to me that sterling may fall, and it is not prudent to keep ALL our savings in Sterling - all eggs in one basket.

I know that we don't have to actually buy foreign currencies to hedge against a Sterling's fall. We can just hedge it, thus avoiding commissions costs. But what are the practicalities of it?

Can we / should we use the futures market? Or spread betting?

Are they safe? Are this companies or traders reliable? Solid? Are there big retail traders for it in Britain?

Thank you all in advance for any advice.

Edited September 21, 2009 by Tired of waiting

[keeprenting]

I keep dithering about getting out of sterling but I'm going to take the plunge now, I think. How much does it cost to buy a foreign currency option or contract for differences tracking the coming fall in sterling or something like that?

[Errol]

Buy some gold as a hedge.

[Rakno]

I am in the same boat and have started the process.

I have opened EUR, CHF, CAD and Indian rupee accounts with HSBC and am planning to use a third party with low commissions to transfer out of sterling. Is there an easier way? I thought futures market had a minimum of amount and I am scared of spreadbetting.

[Wol]

What are you trying to achieve?

[Wol]

I am in the same boat and have started the process.

I have opened EUR, CHF, CAD and Indian rupee accounts with HSBC and am planning to use a third party with low commissions to transfer out of sterling. Is there an easier way? I thought futures market had a minimum of amount and I am scared of spreadbetting.

Do you think you know something the FX market doesn't about these currencies?

[Tired of Waiting]

What are you trying to achieve?

I think Sterling will fall in relation to the Euro and Yen. I want to invest in this 2 currencies.

[Wol]

Spreadbetting is a dangerous game. Leverage will get you in the end.

If you just want to hold these currencies, I'd open an account and then buy or sell through a quality trading platform, e.g. IB or Internaxx.

Don't underestimate how much information the market builds into the price. The FX market is stunningly large and doesn't miss much.

Good luck.

[Tired of Waiting]

Spreadbetting is a dangerous game.

Thank you for the warning. I am really very careful. And I've been familiar with political economy for more than 20 years. But have never speculated with it.

Actually, my track record shows that my most common mistake in the past 20 years has been to over-estimate "the market", and not betting against it. Besides, "the market" just points to the average, with half of it betting above it, and half below it. You just have to chose one side.

And only recently I understood why "the market" gets it wrong so many times: Because "the market" doesn't exist, or at least, not as a thinking entity. And the main problem with it is that the big organisations have been having governance problems, with traders focusing on short term gains (e.g. "carrying trade"?) , and screwing its shareholders in the long term.

For extra safety, the main point re. investing is never, ever put too many eggs in the same basket. And think that is where spread betting can help. I can diversify much more.

<< IB or Internaxx. >>

What are these? Do you have their web-address?

<< Don't underestimate how much information the market builds into the price. The FX market is stunningly large and doesn't miss much. >>

I know. It shouldn't miss. But I can't accept that the pound won't lose at least 10% against the Euro in the next 6 months, and probably more than that against the Yen. Nevertheless, I will not risk more than 10% of my savings in each.

<<Good luck.>>

Thanks.

[Tired of Waiting]

Buy some gold as a hedge.

I think it is too late. I think gold is already too high.

[porca misèria]

Buy some gold as a hedge.

Buy some brambles as a hedge. Great at this time of year!

[Tired of Waiting]

Spreadbetting is a dangerous game.

It just occurred to me that if we keep all our savings in Sterling we would be risking more, with all our eggs in the sterling basket. The one thing that everybody agrees is that the best strategy to reduce risk is: diversification. Right?

[Errol]

I think it is too late. I think gold is already too high.

Too high? On what do you base this analysis?

People were saying the same thing when gold was $250. And they said they same thing all the way up to where it is now.

[Tricksy]

I think Sterling will fall in relation to the Euro and Yen. I want to invest in this 2 currencies.

What are your Euro and Yen liabilities?

[Tired of Waiting]

What are your Euro and Yen liabilities?

I don't have liabilities in Euro and Yen. Actually I don't have liabilities in any currency. I have some savings, and am choosing the best investments for them.

Edited September 20, 2009 by Tired of waiting

[Tired of Waiting]

I keep dithering about getting out of sterling but I'm going to take the plunge now, I think. How much does it cost to buy a foreign currency option or contract for differences tracking the coming fall in sterling or something like that?

Sometimes I felt like it is risky to invest in foreign currencies, as it feels like a bet. But actually, as we keep 100% of our savings in sterling, we are in fact betting 100% on sterling. This is not safe. We are puting ALL our eggs in sterling! This is the imprudent thing to do. Right?

<<buy a foreign currency option or contract for differences tracking the coming fall in sterling or something like that?>>

Exactly. Some questions here. I've done some on-line research, but I don't know what web-site to trust. We need a guide for novices, and from a reliable source. Perhaps the FT?

I'll try it today, ASAP.

[RandomBear]

Sometimes I felt like it is risky to invest in foreign currencies, as it feels like a bet. But actually, as we keep 100% of our savings in sterling, we are in fact betting 100% on sterling. This is not safe. We are puting ALL our eggs in sterling! This is the imprudent thing to do. Right?

<<buy a foreign currency option or contract for differences tracking the coming fall in sterling or something like that?>>

Exactly. Some questions here. I've done some on-line research, but I don't know what web-site to trust. We need a guide for novices, and from a reliable source. Perhaps the FT?

I'll try it today, ASAP.

You live in the UK. What do you need any other currencies for?

What you are doing IS gambling. If you want to gamble then fine, but don't kid yourself that it isn't gambling.

Personally I periodically buy USD at what I think are attractive levels and then hold USD in reserve for US holidays, but I am under no illusions that I am pretty much just punting (although I do at least have a liability to hedge against i.e. my holiday spending).

[Tired of Waiting]

(1) "What you are doing IS gambling."

(2) "You live in the UK. What do you need any other currencies for?"

1: Of course it is gambling. But putting 100% of our savings in sterling is also gambling, and with all eggs in the same basket. It is much more risky.

2: Most of our cost of living in Britain depends on international prices, as most of what we consume is either directly or indirectly imported, including food, and everything depends on energy - oil - which is also set in international prices. If sterling goes down, your sterling will go down too, and your Tesco shopping will go up. Or it will seem to us, but actually is the pound in your pocket that lost value. You are gambling as well.

For instance, have you heard that house prices "went up" in the past months? Well, it didn't, not in Euros. It "went up" in pounds. Or, to put it more correctly, it was the pound that went down.

We shouldn't put 100% of our savings in one currency. We must diversify. I will keep some sterling. Perhaps even 40 or even 50%. But to keep 100% has been very silly of me.

Edited September 21, 2009 by Tired of waiting

[bonner]

The idea that you can hedge small amounts of currency is a bit silly.

The FX market is around $3 trillion dollars. So even if you have a couple of million to spare its going to get swamped.

Most people should look at spreading their hard earned around.

Bit in savings, bit in shares, bit in property, bit in gold etc.

Then if you want a bit of a thrill put some in a managed FX account. Most of the providers have them. The one I know is prety good, but still a risk. Isn't everything.

Have a look at www.amasiscapital.com. As I said there are a lot of good ones, there a lot of bad ones. Look around, dont take my word for it.

Bonner

[Tricksy]

2: Most of our cost of living in Britain depends on international prices, as most of what we consume is either directly or indirectly imported, including food, and everything depends on energy - oil - which is also set in international prices. If sterling goes down, your sterling will go down too, and your Tesco shopping will go up.

So you do have non GBP liabilities to hedge then?

[mattyboy1973]

Bonner is right - look at the funds, otherwise effective diversification is going to be a lot of faffing around.

The Merk funds spring to mind - have a look at their 'hard currency' fund http://www.merkfund.com/fund/mhcf// - no US$, no GBP, a bit of gold and a spread of other currencies. If ultimately your liabilities will be in GBP, you are actually increasing your risk by keeping your holdings outside of GBP. As someone has already commented - the FX markets are jsut about the most efficient and liquid markets there are - you are not going to second guess them.

[Godley]

1: Of course it is gambling. But putting 100% of our savings in sterling is also gambling, and with all eggs in the same basket. It is much more risky.

2: Most of our cost of living in Britain depends on international prices, as most of what we consume is either directly or indirectly imported, including food, and everything depends on energy - oil - which is also set in international prices. If sterling goes down, your sterling will go down too, and your Tesco shopping will go up. Or it will seem to us, but actually is the pound in your pocket that lost value. You are gambling as well.

For instance, have you heard that house prices "went up" in the past months? Well, it didn't, not in Euros. It "went up" in pounds. Or, to put it more correctly, it was the pound that went down.

We shouldn't put 100% of our savings in one currency. We must diversify. I will keep some sterling. Perhaps even 40 or even 50%. But to keep 100% has been very silly of me.

Reading your posts I am struggling with understanding your strategy to be honest. How can you hedge? A hedge is to open up an opposite position, where is your opposite position?

Are you going to buy foreign owned assets at some point in the future? No, you are going to buy a house denominated in sterling, yes.................so what is your point?

If it is inflation you are worried about then your hedge would be to buy gold or to convert your cash into an NS&I bond.

Buying currency the way you are suggesting is GAMBLING.

[Tired of Waiting]

Most people should look at spreading their hard earned around.

Exactly. That is all I want.

Lets forget the word "hedge". I was using it in a broader sense, and not in its new, more narrow "technical-financial-slang" sense.

Bit in savings, bit in shares, bit in property, bit in gold etc.

Exactly, again. And why not a bit of Euros too?!

[Tired of Waiting]

Bonner is right - look at the funds, otherwise effective diversification is going to be a lot of faffing around.

The Merk funds spring to mind - have a look at their 'hard currency' fund http://www.merkfund.com/fund/mhcf// - no US$, no GBP, a bit of gold and a spread of other currencies. If ultimately your liabilities will be in GBP, you are actually increasing your risk by keeping your holdings outside of GBP. As someone has already commented - the FX markets are jsut about the most efficient and liquid markets there are - you are not going to second guess them.

Thank you. Helpful post.

I'll take a look at the funds.

Interesting that they are not holding US$ or GBP !

Once I have GBP liabilities it does make sense to keep most of my savings in GBP.Thanks. For now, I'm just wanting to diversify a bit.

The FX market is the average of millions of investors. But ALL these investors "disagree" with the FX averages - half think they are too high, and the other half think they are too low. The FX points to the average, or medium point. .

[Tired of Waiting]

consider buying some equities that are sterling denominated with worldwide sales eg big oil/pharma.my crystal ball says equities are high and will sell off some more into a bottom next year.They offer a cheap way of spreading risk.

The problems you may have with hedging/buying currency

1 cost

2 being a victim of a wider move on currency markets.Much as you may be surprised to hear it,a major sell off could see currencies such as sterling pick up on a flight to 'quality'.

3 the euro could well be f****d

4 counterparty risk if you go for some etf action in commodities

http://www.etfsecurities.com/en/welcome.asp

I'm a bit of a traditionalist in that I like to hold money in the currency of the country I intend to use it in.There is nothing worse than the sort of s*** that has Eastern Europeans holding Swissie mortgages.

Thank you for the post. Very useful.

I will need more time to research equities. I have done a lot of research on currencies - I mean, on countries' macro-economics.

1. Cost is the problem. Hence my question about other tools, like spread-betting, or futures. I am not familiar at all with these practical aspects.

2. Sorry, but sterling is no longer seeing as "quality".

3. Euro: any individual currency is risky. We should always diversify. I am considering 5 or 6.

4. Commodities: as in equities, I'll need more time to research them. We may be too late for them. they look high already. Gold is in a huge bubble already, IMHO.

Cheers