Why You Need a Backup Plan if you are in the Forex Market
Why do I need a backup plan I hear you say? It’s a big market traded every day. What traders fail to realise is how quickly the FX Market could disappear, meaning traders would instantly lose everything tied up in the market. Never before, in its short history, has the FX Market been so vulnerable. The future of the FX Market is balanced on a knife edge. To explain what I mean we need to look at the history of FX trading.
In previous blogs, I have written about the gold standard which ceased in the 1930’s and was replaced after WW2 by the Bretton Agreement. The Bretton Agreement pegged the value of the US Dollar against the value of Gold and all the other currencies were pegged against the US Dollar. This stabilised worldwide currencies and created a benchmark which allowed global trade.
In the 1970’s US President Nixon, due to economic problems in the US, the run on gold because of a devaluing dollar, took the US Dollar off the Gold Standard and the Forex market that we know today, was created. The US$70 million per day trading market, of the 1980’s rapidly increased to over US$1.5 trillion only 20 years later and continues to grow.
Fast forward to 2020, where world economies are in a mess, some countries have astronomical inflation such as Argentina whose inflation rate is 40.60% for the month of July. Argentina has an average inflation rate of 194.97% although this is way down on the 20,000% (twenty thousand percent) in the 1990s. While that is an extreme, many countries are recording high inflation with fears of more countries experiencing hyperinflation.
Debt levels have increased exponentially, with the introduction of quantitative easing and countries only too willing to pump more liquidity into the markets to stop banks and other businesses from failing. During the March 2020 global lockdown, the US printed Trillions of dollars to keep the economy afloat. The UK printed £656 billion during the March lockdown. Levels of debt, never before seen, which caused GDP of many countries exceed 100%. The US, as I write this is on 130% debt to GDP ratio and expected to reach 141% by the end of September. The UK was on 100% GDP in their last quarterly figures.
During the 2008-2014 Great Recession, the experiment in austerity measures failed, stalling many economies from recovering quicker as governments fought to keep hyperinflation out of the recovering economies. Major lessons have been learnt and since 2014 there has been a move to bring back a gold standard. This has gained momentum and favour with many countries. There are two strategies now being considered.
1. The Gold Standard – bringing countries back onto a gold standard would need to see the price of gold go up to help the world’s economies reduce debt to more favourable and manageable levels. This is gaining the backing of many global economies including Europe.
2. SDR Basket – peg currencies against the SDR Basket instead of the US Dollar. The SDR Basket will in turn be pegged against Gold. The SDR Basket is a digital currency used by the IMF. Pegging currencies against the SDR Basket would remove the demands from China for the Yuan to be used as the international currency in lieu of the US Dollar. With China’s track record of manipulating the price of the Yuan to suit its needs very few want to see the Yuan used as an international benchmark currency. The SDR Basket is gaining popularity as the world’s economies contribute to the SDR for example the US dollar contribution is 41.73%; Europe is 30.93%; China 10.92%; Japanese Yen 8.33% and UK Stirling 8.09%.
So, what does this have to do with the Forex Market?
As I mentioned at the start of this blog, the Forex Market only came into being because currencies were removed from the Gold Standard. If a Gold Standard is reintroduced the Forex Market will cease to exist instantly.
How likely is this to happen?
Very likely, as President Trump and his financial advisor Judy Shelton are in favour of it and have been pushing for the introduction since January 2019. Europe with the euro as one of the largest currencies in the world, a large contributor to the SDR Basket are heavily pushing for this to be instigated quickly. It has gained support from the IMF (International Monetary Fund) who are key influencers in the world markets. As more countries look at ways to bring their increasing, out of control economies back into some resemblance of order the new Gold Standard is gaining more popularity.
World economies are desperate to find a way around the heavy debt/GDP ratio and bring currencies back onto a gold standard either directly or through the SDR would help them.
Gold investors are supporting the move as there would need to be a major increase in the value of Gold to rebalance world economies which is beneficial for major institutional investors who in turn are key to help support government fiscal policies.
Banks have been building their gold reserves since April 2019 when Gold was deemed zero risk by the Basel III agreement. Prior to the agreement gold had a risk level which prevented banks from holding more than 30% of their assets in the commodity. By moving Gold to zero risk the foundation was laid to support banks, currencies and a move back to a Gold Standard.
Where does this leave Forex Traders?
Simple, the Forex Market would cease to exist if the Gold Standard is reintroduced as there would be no trade or movement between currencies which have a set price to gold. Now is the time to have a backup plan. A plan of investing rather than gambling for despite all the strategies devised about Forex Trading, it is simply betting on the movement of one currency against the next with a 50/50 chance of being right. If currencies are pegged against a Gold Standard then there is no currency movement and there is no Forex Market.
Amateur Forex Traders need to think seriously about being in the Forex Market. They are likely to be the ones who lose the biggest as they tend to place a larger percentage of their overall wealth or lack of wealth into the hope of striking it big on Forex Markets.
Learn to invest and ensure you have solid investment reserves behind you before entering the Forex Markets as it’s very likely the perceived Goose laying the Golden Egg could shortly be killed off. Have a backup plan to not only protect any wealth you have created but to ensure it can grow without a Forex Market.
The Backup Plan
I learnt trading after I had built and created a wealth foundation. I also predominately trade Gold with the occasional stocks in volatile markets. I ensure no more than 10% of my existing liquidity is used for Trading due to the high risk of the market.
The “backup” plan has always been my Plan A, build wealth through business, property, shares, bonds and bullion. Build a solid foundation and only when there is a solid foundation use 10% of surplus cash to trade if desired.
With world economies in recession and living standards likely to get tougher, with more countries likely to adopt the new Gold Standard, if you are in the Forex Markets the backup plan is essential. Don’t wait until it is too late.
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