Currency Trading - How to Access and Trade the World's Biggest Market

In 1972, my father, the late Edward B. Gotthelf, met with Everett

Harris, President of the Chicago Mercantile Exchange, to discuss

promoting their new International Monetary Market (IMM).

Major world currencies were being floated against the dollar under

a new Smithsonian Agreement consummated in December 1971.

The exchange was working swiftly to create foreign currency

futures that would take advantage of an expanded fluctuation

band from 1 to 4.5 percent. Although this was hardly the kind of

dramatic swing seen in some agricultural markets, this evolutionary development represented the potential for a 9 percent trading range from top to bottom. Approximately 4 months later,

western Europe formulated their European Joint Float, which permitted a 2.5 percent intermember parity fluctuation labeled the

snake and a 4.5 percent band against the dollar called the tunnel.

Again, the implied range against the greenback was 9 percent.

If memory serves me correctly, a gentleman named Mark

Powers was involved in making currency futures a reality. This

bold plan represented the birth of financial futures and a new era

of derivative trading. Founders of currency futures appropriately

reasoned that a 1 to 10 percent margin would magnify a 9 percent

trading range by several hundred percent. Consider that a 5 percent move against the dollar translates into a nickel. If you only

need .01 to .001¢ to accomplish this trade, your potential profit

is 500 to 5,000 percent.

Fortunately, no insider trading restrictions applied to commodity markets. When I visited home from college, my father

excitedly explained the enormous profit potentials represented

by these new markets. He pointed out that certain currencies

such as the Japanese yen and Mexican peso were being revalued

against the dollar. However, IMM contracts hadn’t reflected the

anticipated changes.

It was my first official venture into commodity trading.

Using money earned through summer jobs and guitar performances in coffee houses, I funded my first currency trading venture. With less than $1,000, I took positions destined for

realignment. Within a few months, a few hundred dollars in margin ballooned into a whopping $7,000. Although this was not as

impressive as Hillary Clinton’s alleged gains in soybeans and cattle, keep in mind that these were 1970’s dollars. I immediately

took my newly found riches and went car shopping. For those

familiar with cars of the 1970s, my choice narrowed down to the

Alfa Romeo Berliner at $2,800 and the BMW 2002 Tii at $3,200.

Imagine such prices! The remainder of my profits went toward

paying taxes, tuition, and (of course) party expenses.

Although the BMW represented the car at the time, I remember thinking, “$400! How can I afford the extra $400?” As of this

writing, $400 buys a modest New York dinner for four with a

decent wine, very few drinks, and perhaps dessert. I bought the

Alfa and admit that I drove that car for 17 years—until I married

my wife Paula, who refused to push-start the vehicle on cold

winter days. After all, we were married and she didn’t have to

play that game anymore!

Of course, the point of this introductory story is threefold.

First, it exemplifies the enormous amplification a 9 percent maximum trading range had when combined with a 1 percent initial

margin requirement. In effect, 9 percent became almost 900 percent. By the 1990s, currencies bounced against each other in

multiple percentages. Daily volume grew to average an astounding $1 trillion. World-renowned financier/investor George Soros

realized more than $1 billion over a few days when currencies

were adjusted in the fall of 1992. In addition, the story adds an

often forgotten perspective of changing currency value—the

effects of inflation. Most importantly, it demonstrates a fundamental transition in world currency structures from monetary

standards to commodities.Why is this important? Too frequently, we overlook differences between monetary standards

and commodity valuation. For example, a dollar fixed to gold eliminates gold’s speculative potential. Simply put, gold’s price cannot fluctuate. The dollar effectively becomes gold and gold becomes the dollar. Unlink gold and you have a commodity with price fluctuation potential. Indeed, gold was disassociated with the dollar and President Nixon closed the U.S. Gold Window

early in the 1970s.