I can’t tell you how many times colleagues in the industry have called me an “idiot” for correctly predicting what’s coming next in the markets. Take oil for instance.
Back in 2005, my buddy Greg and I were both working at a Forex firm. At the time, we told some of our friends at work that oil would hit at least $80 a barrel.
This was long before the world had seen $147 oil. In fact, the world had never seen $75 oil. And oil’s current price – $50 – seemed “high” to my friends.
So everyone thought we were insane for even suggesting $80 oil.
We tried to explain that we saw fundamental reasons for higher oil. Namely we saw a worldwide demand that was about to outstrip supply. But on top of that, I had my eye on a specific chart pattern that told me oil would hit at least $80. They still didn’t believe us.
Of course, I don’t have to tell you we were right. In fact, as oil climbed to its all-time high of $147 in 2008, our $80 estimate seemed conservative.
But when oil hit $140 in June 2008, Greg and I started saying oil was too expensive. Once again, my friends in the industry gave us a tough time for suggesting oil might drop. Once more we tried to explain…
No One Believed Oil Would Plummet Either
From a fundamental perspective, we knew the incredibly high oil price would drag down the U.S. economy. After all $4 gas makes a dent in a consumer-driven economy. You can’t spend as much on everything else if you’re shelling out $70 for a gas each week.
From the charts, I saw oil was heading lower too.
Again, we were right. I watched as oil dropped all the way to the high 30s – and we got in.
At $33, the same Nay-Sayers called me an idiot for buying. They just assumed oil was going to $10 or $15 a barrel because once something starts falling it doesn’t stop, right?
|Why Oil Will Pass $100 a|
Barrel in 2011
1. The Charts Say So. Looking at oil’s chart, oil is already making “higher highs and higher lows” as the recessions around the world come to an end. So oil is already trending higher.
2. Demand Is Growing Again. Even though there has been meager growth, it’s been enough to push up oil’s price as global demand for the “black gold” increases again.
3. Bernanke Likes to Print Money. The Fed will continue to print fresh dollars to keep the U.S. out of another recession. In doing so, the Fed will dilute the dollar’s value. That will force anything priced in dollars (like oil) to rise in price.
This just proves what I’ve always said. When everyone pats you on the back for buying a certain stock, commodity or currency – don’t even bother. Just sell now and get your money back while you can. Because once “everyone and their mama” is buying, you’re already too late.
But when everyone calls you a “blooming idiot” for either buying or selling a particular position, hang in there. You will be rewarded. With a little patience, you will be in good shape within a year or so.
I tell you all this, because I’m seeing the same kind of turnaround in oil. Next year, oil will blow past $100 a barrel again. Right now, you can make strategic positions in certain currencies to play off oil’s next rise.
Why Buy Currencies and Not Oil Outright?
Now you could buy oil futures or an oil ETF to play $100 oil. But in the currency market, you can play this trend by buying “oil currencies” such as the Canadian dollar and Mexican peso in the spot forex market.
Why trade these currencies instead of oil itself? First of all, you don’t have brokerage commissions with the currency trades. You have less slippage because there are higher volumes of trading in the forex market.
More importantly, the FX market trades with more leverage. This means you can earn larger profits off oil’s rise by buying the Canadian dollar or Mexican peso.
Both Canada and Mexico are major oil exporters, so their economies and currencies rise and fall with oil’s price. So just how closely do the peso and Canadian dollar track oil? Take a look at the daily, 3-year chart below.
For the Past Two Years, the Canadian Dollar &
Mexican Peso Tracked Oil Exactly
Over the next year, I’ll be telling my Currency Cross Trader subscribers exactly how to trade this trend by buying key Canadian dollar plays. I’ll explain how and when and how much to buy, with exact entry points, stop-losses, and limit orders all lined up.
In the same way, my colleague Evaldo will have exact recommendations on how to buy and sell the Mexican peso in Exotic FX Alert. You’ll know the moment he recommends buying, how much to buy, and at what specific level. We leave nothing to the imagination so it’s easy to follow along.
If you prefer to go it alone, I recommend you keep an eye on the Canadian dollar and Mexican peso for the best time to buy. Everyone may say you’re an “idiot” for playing oil early, but in the end, it will be worth your while.
Sean Hyman, Editor
Currency Cross Trader