NEW YORK ( ETF Digest) -- Confidence is what gives currencies their credibility. The U.S. dollar went off the gold standard with the Bretton Woods agreement during the Nixon administration. This was done because more dollars were being printed than there was gold to back them (55% to 22%). Taking the U.S. off the gold standard, the BW agreement made the dollar the world's reserve currency. This meant many commodities were priced in dollars. Some currencies were permitted to float freely while others maintained a "currency peg" to the dollar. As of late 2011, the U.S. dollar is still nearly 70% of foreign reserve holdings.With expansionary dollar monetary policies post the 2001 and then 2008 bear markets, investors started losing faith in the dollar given supply. And, this sentiment was transferred later to other fiat (paper money) currencies in general as 2011 eurozone debt issues surfaced. For U.S. citizens, purchasing power is being lost and investors look to foreign exchange to hedge their dollar exposure or speculate in markets. ETPs (ETF/ETN) have emerged as an easier, less complicated and less leveraged manner to participate in these markets.
As a former CTA (Commodity Trading Advisor) and CPO (Commodity Pool Operator), I know the value of having an allocation to direct currency ETPs. It's essential to have exposure to these new instruments to hedge against dollar destruction not to mention exposure to gold. Whereas our previous technical analysis methodology involved using evaluating monthly charts, commodity markets must be viewed with shorter time horizons. This is due to obvious increased volatility but also due to the peculiar nature with which underlying commodity contracts trade. Most futures contracts to which ETPs are linked expire quarterly. To be effective, direct commodity investing requires investors to be more active although investors in gold in particular view the asset now as a long-term hold. Nevertheless, a willingness to trade with the trend long or short, or even being on the sidelines at times, is from our view prudent and potentially more profitable. We do this because we've seen large price changes over the past and remaining sanguine about this sometimes isn't a good option. Therefore, it pays to be active and utilize a combination of weekly and daily technical charts to manage risk.Simplistically, we recommend longer-term investors stay on the right side of the 12-month simple moving average. When prices are above the moving average, stay long, and when below remain in cash or short. Some more interested in a fundamental approach may not care so much about technical issues preferring instead to buy when prices are perceived as low and sell for other reasons when high. However, this is not our approach. Premium members to the ETF Digest receive added signals when markets become extended such as DeMark triggers to exit overbought/oversold conditions.For traders and investors wishing to hedge, leveraged and inverse issues are available to utilize from ProShares and Direxion and where available these are noted.