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It's been four long years since I've put pen to
paper and tried to say something intelligent about the Swiss Franc (CHF). When
I started to write these missives back in 2000, the Swiss Franc was my very
first buy recommendation. I have been long the CHF ever since. There have
been ups and downs but I have maintained that long position without fail and
it has been profitable. It's not a flashy investment like gold; meat and
potatoes come to mind. I initially viewed the purchase as an "insurance
policy" and absolutely nothing has happened in six years to change my
mind. When the U.S.
had the September 11th attacks, everyone beat a path to the door of the CHF. The
same held true when the Madrid
bombings occurred. For the smart money around the world, the Swiss Franc has
been, is, and will be for the foreseeable future the money of choice.
As I'm sure most of you are painfully aware of by
now, I am not a lover of fiat money. The history of all currency, without
exception, is government default. I have a drawer full of Latin, Asian, and
European currencies that are worth zero. I will even go so far as to say that
technically the U.S.
defaulted on all of it's gold and silver certificates in circulation when
President Nixon closed the gold window in 1971. If you were take one of these
certificates to the Federal Reserve today, all you would get is a smile and a
new dollar bill backed by the 'full faith and credit' of the United States
government. Personally, I am not impressed. If we really wanted truth in
advertising, there would be a picture on each dollar bill of George Bush
giving you the finger!
With all of this in mind, then why bother with the
Swiss Franc, or any other paper money for that matter? Well first of all, we all
need to use some sort of paper money. Try going to the local Wal-Mart and
paying with a Kugerand. It won't work. There's always plastic but that
implies costs and it leaves a paper trail that a blind taxman could follow. So
we need a currency to get through every day life, and the question becomes
which one. When selecting a currency, you should apply the very same criteria
used when buying a stock. In fact, paper currency is nothing more and nothing
less than a stock share of the country that prints it. I could even make a
case claiming that it implies ownership. So what attributes do we look for in
a currency? Good administration, fiscal responsibility, transparency, the
proper legal structure, as well as fiscal, economic and political freedom are
just a few of the criteria that come to mind. Fourty years ago the U.S. would
have been a lead pipe cinch for any and all of the above. Now, it is the
first one I scratch off of the list. Then there's the Yen. Their printing
press has been way to active for my taste and transparency is always a
problem. The Euro? I don't think the European Union will stand neither the
test of time nor the wave of right wing nationalism that is currently taking
hold in France
specifically, and Europe in general. The
British pound is likewise eliminated due to the UK's
involvement in the Iraq
debacle. Mr. Blair will find out the hard way that nothing good can come of
it. Latin America? Not yet, but maybe in
five years or so.
To my way of thinking, the Swiss Franc is the only
intelligent choice. When was the last time you saw a Swiss soldier in Iraq, or any place else except the Vatican for
that matter? When was the last time the Swiss went to war? When was the last
time that the Swiss government nationalized a company or seized bank
accounts. I've experienced all of this and more in the various places I've
lived, and I can tell you that changes like the ones previously mentioned
influence even the most mundane everyday decisions. These things just don't
happen in Switzerland and that's why every one who has any real money either
has, or would like to have, some of their wealth stored away in that tiny
land. Wealthy Arabs and Jews, Protestants and Catholics, communists and
Democrats alike all want the protection that is implicit in the very name of
the country.
With all of this in mind, I would like to take a
look at the Swiss Franc (CHF) itself. What follows is an historical chart of
the CHF and it shows that from mid-2001 until late in 2004, the CHF
continually appreciated against the U.S. dollar. In late November 2004, it
topped at 89.00 (under a multi-decade high of 90.00) and then began a
secondary reaction that lasted one year. That reaction retraced .381% of the
five-year rally, and is now over. The JUNE 2006 CHF futures contract closed
at 81.93 on May 4th and is, in my opinion, on its way to test the 89.50
levels once
again. Back in 2001, when I first recommended the
CHF, I told my clients that it would eventually trade on a one-to-one
relationship with the dollar. That seemed absurd at the time, but not so now.
I believe you'll see that ratio within a year.
A look at the CHF Weekly Chart below clearly shows
the breakout back above the 50-w.m.a. and I suspect that moving average will
turn up shortly. Support is very strong at 76.23 and should easily withstand
any retest should one occur. As the
new leg up continues, we should encounter
respectable resistance at 82.50 and then again at
84.03, but they will eventually fall just as sure as the sun will rise
tomorrow. After that it's clear sailing until we test the 89.50 level. Will
we get through it this time? I don't know, and no one else does either, but I
think so. As I type, the US Dollar Index is trading below critical support at
85.08 and has broken down further and faster than even I anticipated over the
last month. Asian central banks, whom in fact are the bankers of last resort
for the United States
government, have managed an orderly devaluation of the dollar, so far. As we
approach the critical historical low of 80.00 with respect to the US Dollar
Index, I suspect that there will be a rush for the door and order will be
thrown to the wind. That will lead to a dollar panic and the Swiss Franc,
along with gold, will step to the front as the only real viable alternatives.
In fact, I wouldn't be surprised to see the Swiss go back and put the Franc
on a gold standard as an added measure of security.
In conclusion, if you don't have any Francs, I would
take the time and trouble to acquire some. Either in physical form or through
futures contracts, it really doesn't matter. It is a currency that is
universally known and accepted by any financial institution of size anywhere
in the world. I have always recommended that my clients have a minimum of 10%
of their wealth in Swiss Francs. There are also other ways to gain CHF exposure.
Very few people seem to realize that a blue chip stock like Gold Corp. (GG)
is listed on the Swiss exchange and in Swiss Francs. In any event, check it
out. You'll be glad you did!
Enrico Orlandini
Dow Theory Analysis
Ignacio Merino 636, Santa Cruz,
Miaflores, Peru
Phone: 001-51-56-973-5599 - Fax
: 001-51-19-280-8796
Email: ebo@dowtheoryanalysis.com
Website: www.dowtheoryanalysis.com
For those of you interested in receiving
information on the Funds we manage, please feel free to e-mail us at ebo@dowtheoryanalysis.com and we will respond as soon as possible.
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