Portfolio Upate: Long Swiss Franc

Portfolio Update

Before I get into the Swiss Franc post, I would like to update the funds performance as well as short term issues we have been constantly emailed about. Majority of the funds cash in now deployed in investments, which means the opposite of majority of 2011. As the NAV grows due to expended partner inflows, we will be looking at allocating more cash towards sound investments, but for the time being the fund holds Agriculture (RJA), Physical Silver (PSLV) (where we have added slightly to our position) and the new addition Swiss Franc (FXF).

The funds performance [updated as of 21st of Jan 2012] has been quite volatile to start of with. It is due to our slightly leveraged position of Physical Silver Trust (PSLV). There has been a huge rally as we bought at the recent intermediate bottom. That sent the funds overall performance to a high return. However, we understood that Mr Sprott was planning to do a second offering and reduce the premium, which meant that the Trust price was overvalued has not yet found equilibrium.

We have received many many emails warning us of this issue and we appreciate that very much so. Nonetheless, this issue does not concern us as we are not traders with short term perspectives. As we are expecting the ratio of Gold to Silver to come back to its historical norm of 16 to 1, we also understand that the current true value of Silver is around $100 as Gold trades around $1,600. Therefore a premium of 15% does not really concern us much.

We are much much more worried about being invested into "real" Silver vehicle that has liquidity of a stock. On top of that, as opposed to Comex "paper" Silver, which has about 5% physical backing, we rather own something that is actually stored in a vault in Canada. In the long run we can expect geopolitical problems in Middle East, European Sovereign Defaults and ongoing global currency debasement; so an investor has to make sure the asset bought will actually do what is expected.

Long Swiss Franc

We don't like currencies in general, as we think Western countries are in the process of ongoing debasement to ease the debt burdens on societies. When we look at the global currency picture, we definitely do not like the US Dollar first and foremost, followed by other sick major currencies like British Pound, Japanese Yen and the European Euro. And while we are currently contrarian bullish on the Euro, as everyone falls in love with the US Dollar, an even better currency we do like right now is the Swiss Franc.

Swiss Franc is currently pegged to the Euro by the order of the Swiss National Bank. Therefore, the current correction in the Franc, which has been a major one in this secular bull market against the US Dollar, has been manifested in part due to a central bank decision. Now, if you are a keen student of financial history, you would have learned that central banks almost always tend to be wrong in their decisions to stem currency appreciations and maintain pegs, so we are prepared to take a bet that the current one will also end up being a total disaster. So why did we buy the Franc now, as opposed to before?

Well first of all, we are super bearish on the US Dollar right now. From a contrarian point of view, we can see that investors hold record net shorts on the Euro as of last Friday. Since the Franc is pegged to the Euro, a rise in the Euro will also mean an equal or slightly better rise in the Swiss Franc. So in other words, the Swiss Franc should do at least as well as the Euro does, but possibility much better, because Safe Haven currencies like the Franc tend to thrive in ZIRP environment.

On top of that, there are now shorts on the Swiss Franc futures contracts as well. We think that the current Dollar rally is almost complete, similar to what we saw in 2008 and 2010 spikes. Therefore, the current fall in the Franc, while speculators remain net short, is a great buying opportunity and a great investment.

After a dramatic fall since early August, there isn't a bull in sight when it comes to the Swiss Franc using the Public Opinion. To be quite honest, the sentiment on the Franc is now as low as we have seen it since at least 2005 - and one of the lowest in a decade. As a matter of fact, the Public Opinion on the Euro and the Pound is at a multi year lows too, which is also a great confirming signal that the Dollar rally is due to end very very shortly (more on that later in the week in Part II of the currency post).

Furthermore, I found it very interesting to see a huge Short Interest Ratio on the Swiss Franc ETF (FXF). Ever since the Franc topped in August, investors have gone mad with shorting the currency as if it is going to be a sure bet all the way down to zero. I have a feeling that these short positions will shortly be super squeezed, just like the ones in the Euro COT report (chart above).

Summary

All in all, buying Swiss Franc is very similar to buying Silver. Essentially, it is a bet against the US Dollar - the most fundamentally flawed currency around right now. On top of that, just like Silver few weeks ago, the Franc is very much hated right now and there is above average chance of a rally around these levels. Wish us good luck!

Investment Summary

Date: 18th of January 2012

Investment: Currencies

Product: FXF ETF

Entry: USD $104.78

Percentage of NAV: 11%