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3 Reasons Why You Should Buy the Franc

May 23, 2011 11:20 PM ET
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Seeking Alpha Analyst Since 2009

Forex Gump is my incognito name. My real name is Feras Gimp. When I was a kid, my parents would make me hunt and gather food. So every day, I would go fish at a nearby lake and gather corn from the fields. This process took me all day and left no time for me to play. Play time actually didn’t matter because I had no friends to play with anyway because they were all to busy hunting and gathering food as well. One day, while resting under an apple tree, an apple fell and hit me on the head. I came up with an idea where if I focused on just fishing and I could find somebody to focus on just gathering corn, maybe we could finish working faster and have enough time left to play. So I tried it and it worked. I wanted to fully understand why this worked and that’s where I discovered his love for economics. I later became a senior macroeconomics professor at Pipvard University in Pipston, Pipsachussetts. After several decades there, one day I decided to stop teaching. Leaving campus that afternoon, as I reversed out of the parking lot, I reversed into a pristine Bentley. It was Dr. Pipslow’s car. (Now a fellow blogger on BabyPips.com) He had been invited by the school to demonstrate his ability to float currencies. When we met each other, Dr. Pipslow already knew who I was. He told me not to worry about his whip and explained to me that BabyPips.com needed a macroeconomics expert and wondered if I was interested. I was. So the following day, I changed me name to Forex Gump and created Piponomics.

 1. Strong Growth in the Homeland

The first reason why you should be stockpiling some francs in your piggy bank is that the Swiss economy has been as smooth as Johnny Depp's acting skills. During the 4th quarter of 2010, the Swiss economy grew by a decent 0.9%, bringing annualized GDP up to 2.5%. This ain't half bad, considering that we saw a 1.9% decline in 2009.

Looking ahead, the economy should continue to do well, as companies still have huge piles of cash that can be used towards growth projects and investments. This could lead to job creation as companies will hire more people to help expansion. More jobs equals more spending! Boomshakalaka!

Now, some are worried that the rise of the franc could hinder Switzerland's export industry. However, these concerns may be a little overblown. For the most part, many of Switzerland's exports are high-end luxury goods, which have inelastic prices. What this means is that demand for these goods is stable and isn't as affected by currency appreciation as other goods.

Nobody gonna stop daddy from buying a new IWC!!!

2. The Gold[en] Rule

By now, I assume that all you forex and commodities traders are aware of how strong the franc and gold have been in 2011. This brings me to my second reason to buy the franc -its relationship to gold.

If you've finished all your lessons in the School of Pipsology, you'd know that USD/CHF is inversely correlated to gold prices. The reason behind this is that 25% of Switzerland's money supply is backed in gold reserves! So whenever gold prices rise, the franc tends to benefit as well.

After doing some simple math, I found that USD/CHF has declined in price by about 6.0% so far in 2010. During the same time period, gold prices are up 5.5%! Coincidence? I think not!

USD/CHF vs Gold

Okay fine, it may not be a perfect correlation, but this relationship is worth keeping an eye on. Gold has yet to break below a key rising trend line - as long as that holds, I believe we'll see some good support for the franc.

3. The "Safe-Haven" Factor

The last but definitely not the least reason to buy the franc is its simple "safe haven" status. Historically, the franc has benefitted in times of economic uncertainty.

For one, the Swiss are infamous for their political neutrality and their banking secrecy laws, which attract investors whenever there's trouble brewing in the euro zone or in the U.S.

Secondly, investors like to buy the franc because it isn't as exposed to the euro zone's sovereign debt problems as the other euro zone economies. Recall that around the time when Pip Diddy had a few more strands of hair on his dome, Switzerland refused to join the EU band and preferred to stick to francs instead. Looks who's suffering now!?!

Whether you're a fan of fundamentals or a skeptic, you can't possibly deny that the franc is one big apple (not the brand) in the eyes of the currency bulls. The question is, how do you plan on taking profit from it?


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