The Big Picture for the Week of March 13, 2005

I had an email from a reader asking for some intermarket analysis of currency and commodities. The reader wants learn how to invest or trade in the other asset classes.

My understanding of currencies and commodities might best be thought of as understanding their impact on equity markets. What I think makes trading currencies difficult is getting the magnitude of the move correct. I've done a decent job in my time getting the direction right but haven't even thought about the magnitude. Usually currency moves are much smaller than equity moves.

A lot of energy stocks are up 20% since the start of 2005. You could have made 20% from buying the right stock in January and holding it. To get 20% out of the currency market you would have had to been in and out several times. More trading, if your very good, means taking losses now and then. So instead of several trades it might be fair to say many trades. This requires a much more intensive use of time and method of study. Currency moves tend to be smaller than moves in equities. The other variable in the currency market that government treasuries are also involved in these markets with trading and jawboning. You never know when John Snow or his Korean counterpart will say something to move the market.

If you want to trade commodities I would suggest you read a book. Jim Rogers talks a lot about trading commodities. He says everyone understands sugar, which he is bullish on. I'm not sure I understand how sugar trades. I don't know about a lot of soft commodities. I think it would be arrogant to think I could successfully trade sugar because we use it home. I think understand oil, gold, and a couple of other industrial metals but maybe I don't. Jim Rogers clearly knows what he is doing and perhaps commodities are very easy to invest in but I am not comfortable committing capital to something I don't think I get.

I am probably not answering the questions in the way the reader had in mind. I believe in keeping things as simple as possible. When I think I see demand for a currency I will buy a stock from that country as I have written about Australia. I have written a lot about global demand for oil so I have bought oil stocks and invested in countries like Norway that stand to benefit from good things happening for oil. This is something that I'm comfortable doing so that is what I do. If you are comfortable trading the commodity, that is what you should do.

Thanks for the question.