FT SPECIAL REPORT

Trading Insight

Guessing gameObsession withFed’s expected‘tapering’ blursthe picturePage 2

All a-TwitterSocial mediahelps traderskeep up withbreaking newsPage 3

Focus on factsAvoid followingthe herd wheninvesting inemerging marketsPage 4

Striking goldProfits can still bemined as preciousmetal’s pricerises and fallsPage 6

Inside »

There’s an app for itThe all-purpose mobile phone makes trading on the go a reality Page 4

Friday September 20 2013 www.ft.com/reports | @ftreports

Sinking feelingTalk of Fed assetpurchase movedents emergingmarket currenciesPage 7

On FT.comUncertainty looksthe only certaintyfor investors as oilprice seesaws

ILLU

STRATOR:TIM

ELLIS

2 FINANCIAL TIMES FRIDAY SEPTEMBER 20 2013 FINANCIAL TIMES FRIDAY SEPTEMBER 20 2013 3

On Thursday, September 5, theyield on the benchmark US gov-ernment 10-year bond touched 3per cent for the first time since2011. The following day, the

Bureau of Labor Statistics released the non-farm payrolls report for August. The yieldimmediately shed 10 basis points, thenrecovered four.

It was the same in the stock market.Stock futures initially rallied, becauseinvestors figured that a weaker-than-ex-pected jobs report would reduce the chanceof monetary stimulus being withdrawnearly. Then there was a reappraisal. Thedata were poor, but not poor enough toforce a rethink on stimulus. Stocks fell.

Nor is the trend confined to US markets.The release of marginally better-than-expected UK employment data on Septem-ber 11 prompted a surge in the pound. Suchwild gyrations around the release of keyeconomic data have become a regular fea-ture of markets lately, because the biggestquestions traders face surround the timingand pace of any reduction in the amount ofmonetary support given to the financialsystem, especially in the US.

Since September 2012, the FederalReserve has been buying $85bn worth ofTreasuries and mortgage bonds eachmonth. The chairman of the Fed, Ben Bern-anke, has said it will continue to do thisuntil such time as there is a sustainedimprovement in the unemployment rate.

However, in May this year, he signalledthat the process of scaling back those pur-chases might commence as soon as theautumn. Markets have been obsessed withthe so-called “taper” ever since. It was themain factor behind the sharp correction inemerging market stocks and currencies inJune, and the steepening of yield curves inthe US and elsewhere. UK governmentbond yields have also flirted with the 3 per

cent mark, having hit a record low of 1.41per cent last August.

How should traders manage risk when arogue set of data can snap a previous trendso quickly? “Very carefully,” is the shortanswer, says Michael Hewson, senior mar-ket analyst at CMC Markets. “You need tolook in advance at where the key levels are.You know that with something like thenon-farm payrolls, you’re going to get adollar move, so you need to draw up a planbeforehand for what you’re going to do ifthe numbers are good, bad or neutral.”

David Jones, chief market strategist withIG Index, says it is generally wise to wait 30minutes or so for the market to digest thedata. “Second guessing the number aheadof time is no better than flipping a coin,”he says. Trading immediately after arelease is often tricky, too. “You wouldn’thave been able to get in following those UKemployment numbers [on September 11],for instance, because the market gappedhigher,” he observes.

Simon Smith, head of research at FxPro,agrees. “Quite often with data, you see themarket move and then reverse,” he says.“Sterling reversed 50 per cent of its initialmove on that labour market data. You seea similar pattern on euro/dollar around theUS jobs report. On two-thirds of the occa-sions over the past year, we’ve seen theinitial dollar reaction either partly or fullyreversed within the first hour.”

Another strategy is to use options. “Astraddle – buying both a call and a putoption – will give you some protectionwhatever the market does. A straddle onthe Dow would cost the equivalent ofaround 80 points on the index, so anymovement in excess of that in either direc-tion would result in a profit,” says MrJones.

However, volatility in options pricingtends to mean that the cost of such insur-

ance rises around the dates of key datareleases.

Traders might also want to consider seek-ing out asset classes that are less influ-enced by the nuances of economic data orthe pronouncements of central bankers.However, this is easier said than done.“The industrial metals complex is very sus-ceptible to data coming out of China,”notes Mr Hewson at CMC, while preciousmetals often move inversely to the dollar,which is very sensitive to central bankchatter. Emerging market equities and cur-rencies have also proved sensitive to any-thing Fed-related – and to Chinese data.

The energy complex is less prone to cen-tral bank utterances, but comes withanother set of risks. The escalation of ten-sions over Syria has served as a reminder

that crude oil prices in particular are heav-ily influenced by geopolitical issues.

Mr Smith, at FxPro, suggests seeking outcurrency pairs that do not involve the USdollar, although he cautions that there willbe a price to pay in terms of reduced liquid-ity and wider spreads. “Short Aussie, longKiwi was a great trade between April andJuly, while sterling-yen is getting interest-ing, having recently broken above May’shigh.”

Concentrating on specific stocks isanother strategy; Mr Hewson notes that apopular trade among CMC clients is to golong of an individual stock – Vodafone

andApple are particular favourites – andshort of the corresponding index, such asthe FTSE 100 or S&P500, as a hedge. Such“pairs trades” are also a feature of clientactivity at IG. The objective is to captureany upside in an individual share, butguard against the possibility that the widermarket will lurch lower.

Short positions in stock indices may bemore than just the other half of a pairstrade, though. Risk aversion is growing,perhaps reflecting the sheer number ofpotential banana skins that litter the trad-ing landscape. Aside from the obviousmeetings of the Fed’s rate-setting commit-tee (on October 30 and December 18, thelatter one including a press conference),there is the appointment – possibly immi-nent – of the next Fed chairman and theGerman federal elections on September 22.

Mr Hewson also points out that the Ger-man constitutional court has yet to issue afinal ruling on the legality of the EuropeanStability Mechanism; there could be furtherwrangling over the progress, or lack of it,in restructuring Greece’s debt; and thepolitical situation in Italy, where SilvioBerlusconi faces ejection from parliament,remains fragile.

“I’m basically quite optimistic for the restof the year, barring any accidents, but I’mcertainly not expecting fresh record highson the FTSE,” says Mr Hewson. “I thinkit’s optimistic in the extreme to be lookingat 7,000 plus by the end of the year, as someare doing.” He notes that for all the talk oftapering, US jobs growth has been weakerthis year than it was last.

Mr Jones predicts the intense Fed-watch-ing will continue. “It’s all about the taper. Idon’t think it’ll be a big surprise when theystart to rein it in. But we might get apleasant surprise. Perhaps people havebeen too pessimistic about the effect it willhave.”

Fed sets guessing game for tradersOverviewObsessionwith ‘tapering’ ismaking it harder to digest key economic data, writes JonathanEley

In April, US markets suf-fered a brief but sharp sell-off after a fake tweet fromthe hacked Twitter accountof newswire AP announcedan attack on the WhiteHouse.

The Dow Jones fell 150points in just two minutesand disrupted trading in theeMini S&P 500 futures con-tracts on CME.

While the market quicklyrecovered after it emergedthat the tweet was fake, theincident underlines thegrowing influence of Twit-ter and other social mediaon investor sentiment.

“There’s a general under-standing now that Twitter,as well as other forms ofsocial media, is becomingincreasingly importantwhen it comes to tradingand investing,” comments

Angus Campbell of FxPro.“Due to the sheer speed

with which a tweet can beposted and then dissemi-nated across the Twitter-sphere it’s recognised as away to get informationquickly and use that toassist in making tradingdecisions,” Mr Campbelladds.

Chris Beauchamp, marketstrategist at IG, agrees thatsocial media can bring enor-mous benefits for tradersattempting to keep up withmarket gyrations.

“As a source of breakingnews it is almost invalua-ble, and there are plenty ofTwitter users with usefulobservations to make thatcan help traders to chart acourse through choppywaters,” he says.

Michael Hewson, seniormarket analyst at CMCMarkets, believes Twittercame into its own duringthe eurozone crisis. “Themain reason I find itextremely useful is that Ihave managed to cultivatenumerous useful contactson the ground in Europe asto what is really happening

in Greece, Italy, Spain andPortugal, gaining valuableinsights into political fac-tors that influence decisionmaking in the various coun-tries in crisis.”

However, experts saytraders need to be carefulabout the people theychoose to follow for marketnews, information andinsights. Mr Hewsonadvises checking the factsbefore retweeting some-thing you see.

Lex Webster of Forex.comsays successful trading hasalways been about gather-ing information from arange of sources and takingdecisions based on a spreadof data. Social media is nodifferent, she says, but addsthat it would not be pru-dent to rely on it solelywhen making a trade.

Uriel Alvarado, chief mar-keting officer at Saxo Capi-tal Markets, says it isimportant that traders havea process in place to corrob-orate the information theyfind through social mediawith other credible sourcesbefore making decisions.

“The case of the Associ-

ated Press @AP hackedTwitter account demon-strates the speed andimpact that network-basedinformation sources alreadyhave on the markets andthe damage that they cancause if misused,” he says.

Saxo Capital Marketsruns a social media cam-paign, #TradingDebates,which aims to facilitateinformation exchangebetween multiple crediblesources and engage its trad-ers in discussion withexperts to better educatethem.

Brokers are attempting toemulate the success of whatthey call social trading bylaunching “follow-me” or“copy trading” platforms.These enable investors tocopy positions of successfultraders with a record.

Currency broker FxProrecently announced it wasplanning to launch a“SuperTrader” platformthis autumn featuringabout 200 forex traders,whose positions can be cop-ied by other FxPro traders.The move follows thelaunch of the CopyTrader

function by eToro, whichenables users to duplicatethe trading positions of suc-cessful traders, by placing apercentage of their depos-ited funds in the sametrades.

According to KevinAshby, chief executive ofCapital Spreads, one use ofsocial media that is onlyjust emerging is the conceptof sentiment-driven invest-ing.

Brokers and market-mak-ers already publish generalmarket sentiment indica-tors, such as an FX supplierpublishing how many cli-ents are long – and howmany are short – for a par-ticular currencypair.

“Social media

can take this concept toanother level,” says MrAshby. “Without intendingto provide fuel for tradingmodels, people are makingcomments via several chan-nels, which in aggregatecreates a much more granu-lar view of market senti-ment.”

He adds: “Consumer-ori-entated organisations arealready collecting senti-ment-based data to directproduct development, iden-tify target audiences, focuspromotions and adjust mar-keting in real time.

“Developing these tech-niques and applying themto trading is a natural pro-gression.”

Tweets help chart course through choppy watersSocial media

Tanya Powley on aninformation sourcewhose influenceis growing fast

Warningnote: becareful whoyou chooseto followAlamy

Man who moves the markets: US Federal Reserve chairman Ben Bernanke’s comments on possible tapering of bond purchases have put risk higher on investors’ agendas Getty Images

‘Quite often with data, yousee the market moveand then reverse’

Simon SmithHead of research at FxPro

Trading Insight Trading Insight

4 FINANCIAL TIMES FRIDAY SEPTEMBER 20 2013 FINANCIAL TIMES FRIDAY SEPTEMBER 20 2013 5

Trading Insight Trading Insight

Without risk management,many traders could see theirprofits quickly turn into largelosses, writes Tanya Powley.“Trading financial markets

requires two great skills,”says Nick Lewis, head of riskat Capital Spreads.“The first is the prediction

of the underlying marketmove.“The second is the ability

to risk manage the position.”

Managing your risk isparticularly important involatile markets.Matt Basi, head of UK

sales trading at CMC MarketsUK, says: “With equitymarkets having pulled backfrom their highs earlier in thesummer, many traders areconcerned with managingtheir downside if US centralbank policy becomes lessaccommodative.”

One of the simplest waysto manage your risk isthrough a standard stop loss.These are used to reduce riskby closing a losing trade oncea market passes a triggervalue set by the trader.However, during times of

market volatility your tradecould sometimes be closedout at a level that is differentto your trigger value.This is where some traders

might prefer to opt for aguaranteed stop loss, whichensures closing the trade atthe trigger value set by thetrader.A further option for traders

is a trailing stop loss.Other risk tools include

index hedging and long/shortstrategies.The full version of thisstory is published atwww.ft.com/trading-insight

Risk management Range of techniques aim to stop losses getting out of hand

Being a generalist inemerging markets is to bea mindless herd memberand the herd has no mind.It is just pushed bysnapping dogs. So ponderthe particularities of aplace, an industry, asector: there will befantastic opportunitiesonce the herd stays put.

What lies behind therecent rout? Quantitativeeasing (QE) is themonetary policy drug ofchoice right now and thethreat of its withdrawalhas already induced anugly international bout ofcold turkey in worldmarkets.

Princeton University’sJean-Pierre Landau, a

former Banque de Francedeputy governor, put itmore diplomatically at lastmonth’s Jackson Holeannual summit for centralbankers. Accommodativemonetary policy hasaverted one globalfinancial crisis, butinadvertently producedanother – capital markets’anxiety over how soon andhow fast QE might beunwound. Mr Landau waspessimistic about the levelof central bank co-ordination necessary to getoff this drug without pain:“The most likely scenariois that of progressivefragmentation of theinternational financialsystem.”

Since December 2008, theUS Federal Reserve haspoured easy money intothe US economy and, by

extension, the globalsystem, obedient to one ofits mandates, namelygetting the US back towork. It has done thispartly by keeping a tightlid on US overnightinterbank lending rates,maintaining them in arange of 0-0.25 per cent.On top of that, it hasbought almost $2tn oflonger-term US Treasurybonds. This vast QE, aidedand abetted by similar (ifsmaller) schemes in Japanand the UK, has had theinevitable consequence ofdragging thousands ofbillions of dollars intoemerging markets, in thedesperate quest for yield.

Those days are not quiteover but the smartestmoney is trying to figureout when US interest rateswill start to rise and

dispel the Fed’s opiate-induced calm. For some,this is creating risinghysteria; others areexhorting us to calm downbecause this is just areturn to the status quoante bellum. The canniest,of course, are on thewatch for freshopportunities, and tryingto ignore scaremongeringheadlines in normallyreputable media.

What are the facts? OnMay 22, Fed chairman BenBernanke said he mightstart slowing bondpurchases – “tapering” – ifthe US economy continuedto improve. Almostimmediately the MSCIAsia-Pacific ExcludingJapan Index slipped 14 percent. About $44bn hasbeen withdrawn fromemerging-market stock and

bond funds globally sincethe end of May, accordingto data provider EPFRGlobal.

This retreat fromemerging markets appearsto be a fixed trend.According to the latest(June 2013) Capital Flowsto Emerging MarketEconomies report producedby Felix Huefner and hiscolleagues at the Instituteof International Finance,private capital inflows toemerging markets willtotal $1.145tn in 2013,$36bn less than in 2012.Next year these flows willfall even further, to$1.112tn, the lowest levelsince 2009. That is still awall of money and itmight be seen as a returnto normality rather thanoutright collapse.

As the west went into

deep recession, cut ratesand printed money,investors fled, looking forbetter returns whereverthey could, paying scantattention to thefundamentals of theeconomies of several bigemerging markets. Nowthat the west is in betterhealth, those often weakfundamentals havereminded many investorswhy they had notpreviously entered them.

India and Indonesia, thetwo Asian nations withthe region’s biggestexternal fundingrequirements for theircurrent-account deficits,have stumbled. The Indianrupee fell to an all-timelow in July after thecountry’s current accountdeficit widened to anunprecedented $87.8bn in

the fiscal year that endedin March. Also in July,Indonesia’s currentaccount deficit climbed toa record, economic growthslowed and inflationgeared up.

Overall, more than $1tnhas been wiped fromequities in emergingmarkets in the last fewweeks. The hope that aslower-growing developedworld was smoothlyconverging with a faster-growing emerging worldis, if not over, thencertainly delayed.

For anyone exposed toemerging markets as awhole, standing in theway of the crowd headingfor the exit makes littlesense. Too many countriesin the emerging world faceserious structuralproblems that were,

perhaps justifiably,ignored when thedeveloped world’seconomies were being putthrough the wringer. It isdifficult to ignore incipientrevolution in Egypt,appalling civil war inSyria, bitter politicaldivisions in Turkey andrampant corruption inIndia when the west seemsto be on the mend.

The key to all this is anindividual country’sbalance of payments.Trading on the basis of “isthis a risk-on or a risk-offday?” is unwise. Tradingon the basis of theunderlying strengths orweaknesses of a nation’seconomy might be dullerbut is more rational. It iseasy to get distracted bynews flow but look out foreconomic fundamentals.

Look to the fundamentals to exploit opportunities in emergingmarketsOpinionGARY MEAD

Trading on theunderlyingstrengths orweaknesses of anation’s economymight be duller butis more rational

In 1995 Bill Gates, the founder of Micro-soft, gave a newspaper interviewexplaining what he believed the futurewould be like.

In the information age, he said, wewill all carry pocket PCs that will act as acombination of computer, cash, cameraand phone. Everyone will have one.

Nearly 20 years later his predictionsabout “mobile wallets” have been all butfulfilled, and although not everyone hasone the number of people who do rises allthe time.

Shipments of smartphones outnumberedsales of other types of mobile phone for thefirst time this year, according to technol-ogy research firm IDC. Six years after thefirst iPhone was sold, mobile phones haveevolved into sleek, handheld computersable to do anything that a PC can do, andin some cases more.

Stuart Welch, chief executive of TD

Direct Investing, says as people use phonesto live more of their lives online – whetherit is booking a holiday, banking or engag-ing with friends – it is only natural thatinvestors would do the same and wantdevices that let them keep track of theirportfolios and take advantage of marketopportunities immediately by makingtrades on the go.

This trend has been accelerated byincreased volatility in the wake of thefinancial crisis, making investors less will-ing to leave their positions unwatched forlong periods of time.

For investors, the benefit of using amobile app to trade means access andspeed. Trading on a phone enables execu-tion times of 150 milliseconds – and allowsusers to check positions and prices,streaming technical charts and live newsfeeds, without having to run back to theiroffice or home computer.

Spread-betting companies such as IGGroup, City Index, CMC Markets andsmaller rivals have taken advantage of therise in smartphones by launching theirown trading apps for iPhones, BlackBerrysand Google Android phones. iPad apps arenext.

“We certainly see this as a growth areafor TD Direct Investing,” says Mr Welch.“Mobile trades on the TD Trading app cur-rently account for 8 per cent of all clienttrades, leapfrogging telephone trading tobecome the second most popular tradingchannel after online.” TD says it has moreplans for mobile investment later in theyear.

Mobile trading means never having tomiss a potential opportunity, says Christo-pher Beauchamp at IG Index.

About 30 per cent of trades at IG Indexare now placed via mobile devices, withApple products remaining the most popu-

lar. Of those 30 per cent, more than halfwere placed via iPhones, with Androidtrades making up a quarter.

“Our apps have recently gone throughan overhaul, with the separate CFD [con-tracts for difference] and spread bettingapps merged into one ‘IG Trading’ app thatallows users to access both CFD andspread betting accounts on the one plat-form,” he says. “This has been designed inresponse to client feedback and reflectsour commitment to continual improve-ment.”

The companies see mobiles not just asdevices that can help investors improvetrading time but also as a way of enablingclients to become more engaged with theirinvestments and more loyal to the com-pany.

Mobiles are driving new business.According to IG Index, about 10 per cent ofrecent new accounts have been opened via

a mobile device.“This means that there is a growing

number of clients whose interaction withthe platform is done entirely via mobiledevices, without going through the web-site,” says Mr Beauchamp. “With the iPadgaining in popularity as a means of trad-ing (accounting for about 20 per cent oftrades placed via mobile devices) this is atrend that we expect to continue.”

Mobile trading, although more stream-lined, can be more complicated than trad-ing on a desktop computer. Investors can-not call up multiple tabs on a phone, mak-ing it harder to switch between marketcharts without relogging on to the site.

Unlike websites, mobile apps also tend tobe designed for certain phones, whichmeans that some customers may be leftout, and mobile trading relies on a mobileinternet connection, which can be morepatchy than desktop connections.

And there are some concerns about theimpact that an ever growing need for datavia smartphones might have.

Work supported by a multimillion-poundgrant from the UK government to helpdevelop 5G mobile technology is underway, following the auction of the 4G spec-trum. Some analysts forecast that therewill be an 80-fold increase in data used inthe next 15 years, which could lead to a“capacity crunch” for networks andincreasingly patchy service or even black-outs.

Investment companies insist that theseconcerns simply highlight how importantonline mobile access is. For investors, theysay, the benefits of real-time charts andnews feeds and the knowledge that youcan access your investments whenever andwherever you like far outweigh the down-sides.

Deals made onthe go boostaccess and speed

MobileVolatility has investors reluctant to leavepositions unwatched for long, writesElaineMoore

ILLU

STRATOR:TIM

ELLIS

6 FINANCIAL TIMES FRIDAY SEPTEMBER 20 2013 FINANCIAL TIMES FRIDAY SEPTEMBER 20 2013 7

Love it or loathe it, gold hasattracted many investorsover the past decade, but inrecent months volatileprices and uncertainty haveput its future in question.

When Gordon Brown, aschancellor of the exchequer,decided to sell off a portionof the UK’s gold reserves in1999, the price stood atabout $280 per ounce. Theprice rose steadily to a peakof more than $1,900/oz in

2011 but finally ran out ofsteam in 2012 and has expe-rienced some sharp pricereversals this year. It istrading at about $1,324/oz.

Experts point out thatwhile a fall in the price ofgold negatively affectsthose invested directly inthe physical metal, traderscan play price falls to theiradvantage.

The question for mostinvestors who tend to usethese markets for hedgingor speculation is how tomake money from fluctuat-ing gold prices.

“Gold, that preciousmetal, store of value, pillarof financial sanity has cer-tainly dumbfounded tradersof late,” says Nick Lewis,head of risk at CapitalSpreads.

“When quantitative eas-

ing began in 2008, manytraders foresaw a WeimarRepublic-type hyperinfla-tion taking grip across thedeveloped world.

“That fear of uncontrolledprice rises naturally sawtraders pile into gold, andup until 2011 their thesislooked good as centralbanks around the world hadadopted the ‘print to pros-perity philosophy’, churn-ing out money at unprece-dented rates never seenbefore.”

However, Mr Lewis pointsout that, as many gold bugsand notable traders have

discovered, gold prices havenot kept pace with theincrease in the money sup-ply. “Since the high in 2011,gold shed almost 39 percent, making another newlow in this down trend atthe end of June at $1,180.4/oz,” he says.

Rising or falling, thereare various ways in whichinvestors can gain exposureto the metal. The method ofinvestment will typicallydepend on the timeframe.Longer-term investorsmight choose gold funds,mining shares, exchangetraded funds and physicalgold.

Active traders tend toconcentrate on futures,options, spread betting andcontracts for differencebecause of their shortertrading horizons and desireto use leverage to amplifythe movement for theirtrading positions as theyseek rapid gains.

As spread betting is aderivative, you do not actu-ally own the physicalunderlying asset. But youcan profit from rises andfalls in the price of gold viaa spread bet. Any capitalgains you make from finan-cial spread betting are com-pletely free of capital gainsand income tax and spreadbetting is also exempt fromUK stamp duty.

Traders tend to likegold because it can betraded at any time of theday. It is a 24-hour market.Many spread betting firmscalculate gold trades at 0.1basis points per US dollar,which means that for everydollar movement you wouldeither make or lose 10 timesyour stake. So if you buy £5

worth of points and goldmoves up $2 you wouldmake £100 (5 x 2 x 10).

To make a bet tradersneed to decide where goldwill go next. While mostexperts say the potential forfull-scale conflict in theMiddle East is arguably setto be the biggest driver forgold prices in the nearterm, many people are lesssure about the direction ofgold prices over the longerterm.

Brenda Kelly, technicalanalyst at IG, says: “It hascertainly been a more vola-tile year than we have beenused to recently for gold.

There is a feeling that goldhas lost some of its allure –maybe not too surprisingconsidering it is still up byaround 500 per cent sincethe beginning of the cen-tury.”

Some say the gains havecome about as a result ofthe recent uncertainty inSyria and the wider MiddleEast. Joe Rundle, head oftrading at ETX Capital,says gold has reclaimedits label as a haven, withclients piling back intothe asset as risk aversionbecause of potential Fedtapering and Middle Eastuncertainties has becomethe dominant narrative

across global asset classes.“Gold’s a worthwhile hold

when the global economy isin turmoil and you’re wor-ried about where yourassets are protected best,”says Mr Rundle.

“But with the US econ-omy resurging, the euro-zone back in growth modeand the UK economy show-ing encouraging signs ofgrowth, the global economyis in a much better placethan, say, two years agowhen uncertainty drove themarket and pushed inves-tors running to the safearms of gold, core govern-ment bonds, the US dollarand Japanese yen.”

However, Mr Rundlethinks gold could fall below$1,000/oz after the start oftapering and adds that theinvestment case for the pre-cious metal has been tar-nished by the prospects ofFed tapering, and theimpact it has on financialmarkets during the processof tapering.

Alfonso Esparza, seniorcurrency analyst at Oanda,agrees, saying a strong non-farm payroll number and aquick resolution to poten-tial US involvement inSyria would boost the dollarand “in turn set the stagefor the Fed to begin taper-ing this month, negativelyimpacting gold prices”.

This widespread negativesentiment is summed up bySteve Ruffley, chief marketstrategist at CFD providerInterTrader, who says: “Thespeculators have alreadymade their money fromgold. There is just simplynot enough fear or greed inthe markets for gold tohead back to $1,900/oz.”

Profits still tobe mined asprice waversGold

The metal has lostsome of its shine butfluctuations can beexploited, says LucyWarwick-Ching

Jonathan EleyPersonal finance editor

Elaine MooreDeputy personal financeeditor

Tanya PowleyPersonal finance reporter

Lucy Warwick-ChingOnline money editor

Gary MeadFreelance writer on marketsand commodities

Andrew BaxterCommissioning editor

Andy MearsPicture editor

Steven BirdDesigner

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Contributors »

Uncertain future: to make a bet, traders need to decide where gold will go next AP

Trading Insight Trading Insight

Spread betting firms areextending their services toallow clients to bet on moreunusual trading opportuni-ties such as the volatileprice of Bitcoin, the virtualcurrency.

IG, one of the first spreadbetting companies to offertrading on Bitcoin, says thebet was very popular whenit launched, attracting hun-dreds of trades each week.Spreadex also offers lever-

aged trading on Bitcoins,although it says demandhas flattened in recentmonths.

The online currency,labelled as “digital gold” insome quarters because ofits lack of government con-trol, attracted rising inter-est this year when the priceof one coin rose to $266 –only to crash just days laterto $54.

Andy MacKenzie atSpreadex says Bitcoin’sappeal lies in the fact thatthere are a fixed number of“coins” – about 21m in total– that they are entirelyunique, that there exists nocentral bank to control sup-ply and that governmentscannot apply tax.

Clients can take a view

on whether Bitcoin wouldbe above or below certainprices by a set time. “Inessence, the currency isviewed”, says Mr MacKen-zie, “as a potential infla-tion/devaluation hedge”.

Bitcoins were trading atabout $133 this week. Vola-tility took the price past$260 in the middle of April,which was at the same timethat gold, investors’ tradi-tional haven, plunged to atwo-year low.

“Some may question theneed for a new currency orthe coin’s use as a store ofvalue,” says Nick Lewis,head of risk at CapitalSpreads.

“But one thing is for sure,it looks to be easier andquicker to transfer than

other asset classes and ishere to stay and willundoubtedly thereforeevolve,” he adds.

“At present, the currencyis not issued by govern-ments or private companiesbut run by computer codethat distributes the coins ata set rate to people whodevote servers to keep thecode running,” says MrLewis.

“It is already possible tospread bet on the coins andthere is already talk of Bit-coin bonds and regulation.Who is to say the Bitcoincan’t be as big a deal as theeuro in future or is it justanother bubble? We arewatching this exciting newspace.”

Shai Heffetz, managing

director of spread bettingand CFD provider Inter-Trader, warns that Bitcoinsrate as “a double-edgedsword”.

He says: “Due to elevatedimplied volatility, one canmake or lose substantialamounts of money in ashort span of time.”

Despite being called“coins” and treated by mostinvestors like a currency,Bitcoins have more in com-mon with commodities asan asset class, says Mr Hef-fetz. “First and foremost,Bitcoins have no intrinsicvalue,” he points out.

“Unlike fiat currencies,no one will pay interest tosafeguard Bitcoins. Sec-ondly, Bitcoins are finite.Like gold or oil, there is a

limited supply of Bitcoinswhereas central banks canprint money with no stop.Furthermore, Bitcoins –just like commodities – aremined. Effort is required toextract them.”

Mr Heffetz says Bitcoinhas the potential to becomea legitimate currency.

He adds that the Bitcoincommunity must sort outits operating principles fol-lowing concerns that itcould be used by organisedcrime and terrorism gangsto launder money.

Bitcoin hit the headlinesin recent months, after NewYork’s banking regulatorbegan investigations intoseveral companies, as partof an inquiry into the vir-tual currency industry.

Virtual currency develops as a real alternativeBitcoin

‘Digital gold’ isattracting risinginterest, writes LucyWarwick-Ching

Summer is usually a relativelypeaceful time for foreign currencymarkets as investors make use oftheir annual leave.

This year things have beenslightly different. Emerging markets havemade headlines as currencies such as theBrazilian real, Indian rupee and Indonesianrupiah tumble.

Talk of the US Federal Reserve moving totaper its asset purchases – known as quan-titative easing – acted as a catalyst butworries about emerging market debt andunrest in the Middle East have also had animpact.

Brokers say the range of factors that canaffect currency markets can be dizzying forprivate investors, but the speed of move-ment also means that the FX market is aplace where hefty profits (and losses) arepossible in a matter of minutes.

FX trading may be complicated, saysMarshall Gittler of IronFX, but investorscan always fit the size of their trades tomatch their confidence in how well theyknow the market.

“Traders trying to make a living from theFX market are going to want to know agood deal of technical analysis, understandthe fundamentals and be willing to spend alot of their time watching screens,” he says.“But someone who simply thinks [Bank ofEngland governor Mark] Carney is eventu-ally going to want to push the pound downcan sell some pounds against the euro onlittle or no leverage, and wait it out.”

Novice investors in the FX market canalso forego leverage and simply wait fortheir chosen currency pair to move in thedirection they want.

Investors who want to bet on currencymovements right now should concentrate

on the dollar, thinks Michael Hewson, sen-ior market analyst at CMC Markets. Hefeels most CMC Market clients are leaningin this direction.

“The US dollar is likely to be the mainbeneficiary over the next three months ascontinued Fed tapering speculation booststhe greenback,” he says. “Ongoing con-cerns about the situation in the MiddleEast are also likely to provide a havenbias.”

The euro, on the other hand, may wellcontinue to come under pressure, he says.

“The fortunes of the euro are likely to betied to the fortunes of the German econ-omy, whatever the result of [this week-end’s] elections,” he says. “Anyone bettingon a change in tone from Germany withrespect to its attitude towards the periph-eral economies is likely to be disap-pointed.”

Dean Popplewell, director of currencyanalysis at Oanda, the foreign exchangetrading platform, agrees that geopoliticaland event risk are supporting the US dol-lar. “Investors have been shifting capitalback to less risky markets like the US,” hesays. “Historically, it has been seen as asafe haven investment in times of uncer-tainty. Syria and Middle East concerns areplenty sufficient to support the dollar fur-ther.”

Kathleen Brooks, research director atForex.com, is less certain that the US cur-rency can continue to rise. “Those lookingfor a sustained trend in the dollar havebeen stumped in recent months,” she says.“After hitting a three-year high in July, thedollar index tumbled throughout the sum-mer months.”

The dollar index, which measures the dol-lar against a basket of currencies, then rose

later in the summer, but Ms Brooks saysthat investors remain worried about theend of the QE programme and strength ofthe US economic recovery.

On the other hand the Australian dollarhas, she says, been a fantastic trade fortrend followers since April when it fellfrom US$1.05 to below $0.90. The question iswhether this movement has now run itscourse. “After the Aussie elections in Sep-tember [won by Tony Abbott’s centre-rightcoalition] there could be less downwardpressure from political forces on the Aus-tralian dollar,” she says.

Elections in Europe are also on the way,but to Ms Brooks things are lookingbrighter in the wake of better growth fore-casts.

“There is a risk that after the Germanelections sovereign fears could flare upagain,” she cautions. But investors mightbe willing to overlook deep-seated financialproblems and focus on the positives.

For the euro, a prolonged downtrend ismost likely if there is a flare-up of thesovereign crisis, particularly in the larger

economies of Spain or Italy, she says.The range of investment options availa-

ble makes foreign exchange a useful assetfor investors who want to diversify, saysAngus Campbell at FxPro Headquarters.

“Even though FX is not traded on anyformal exchange, by volume it is the mostheavily traded asset class in the world,” hesays.

The scale of the market means that itfluctuates like any stock, bond or commod-ity, providing investors with the opportu-nity to profit from movements.

The past few years have seen a prolifera-tion of venues facilitating FX trading and ahuge investment in technology by compa-nies offering the services, so execution is asfast and as reliable as any exchange.

“The tools now available to individualretail investors are ground breaking andmany used to be the preserve of institu-tional investors only,” says Mr Campbell.“This means that any retail investor canseriously consider allocating a proportionof their portfolio to the FX markets inorder to diversify their portfolio.”

Tapering talk addsto uncertaintiesForeign exchangeTumbling emerging currencieshavemade it a busy summer, writes ElaineMoore

Election conundrum: sovereign fears ‘could flare up again’ after the German poll Epa

‘There is simply notenough fear orgreed in themarkets for goldto head back to$1,900 an ounce’

8 FINANCIAL TIMES FRIDAY SEPTEMBER 20 2013