World Currency Profit Gameplan – Phase 1

Recently, I told you I was working on a special Currency Report, with profit recommendations for a large basket of world currencies.

There’s so much information here, I’ve decided to break it into a two-part series.

The simplest way to do this is to start with the Big Five. These major currencies serve as the “drivers” for the minor ones. In my upcoming Part 2, I’ll tell you which of the minor currencies (like the Aussie dollar or the Swiss franc) are tied to which of the major ones, how that impacts their direction, and how you can profit.

Right now, we’ll start with profit recommendations for the 5 major currencies that drive all the rest.

THE BIG FIVE – CURRENCY GAMEPLAN, PHASE 1

The five currencies fueling the world economy right now are GOLD-USD-EURO-YUAN-YEN, in that order. (Gold, as I’ve written many times before, is a currency, not a commodity.) Everyone else is a minor player.

Keep in mind that no currency is an island unto itself. They do not operate in isolation. In a very long view, central banks will eventually destroy the value of paper money and gold will be the only currency left standing. Until then, some of these currencies will go up and others will go down, in an interconnected domino effect. (More on that in Part 2.)

Of these five currencies, gold and the dollar are going up, and are likely to continue doing so for some time. The euro, the yen and the yuan are going down.

Here’s how to profit from each one.

As always, puts are my preferred trade as a less risky way to play the short side.

GOLD – Going up to $4000-$5000 an ounce over the next several decades

Gold is the anti-paper currency. It is insurance against the destruction of the dollar (and all other paper currencies) by central bankers. The destruction of the value of paper money is a certainty. It is as certain as death and taxes.

Since President Richard Nixon took the United States off the gold standard in the early 1970s, the U.S. dollar has lost more than 90% of its value against gold. I believe before central banks are done with their monetary experiments that are destroying the world, the U.S. dollar will lose another 90% or more of its purchasing power against gold.

Federal Reserve Chair Janet Yellen as well as European Central Bank President Mario Draghi and Bank of Japan Governor Haruhiko Kuroda have publicly stated that they want inflation to rise. That means that they want the value of paper money to fall. While official inflation statistics say that inflation is low, real-world prices are rising quickly. These central bankers are completely failing in stimulating economic growth, but they are succeeding in destroying the value of paper money.

Gold will protect you from what they are doing. Gold will protect you against the inflation that is destroying the value of your paper currencies, as well as the value of your stocks and bonds that are denominated in those paper currencies.

STRATEGY: BUY

There are a number of ways to own gold. The best way is to own physical gold, and I like coins, which can be purchased from a number of reputable dealers.

The dealers I like personally are Kitco (www.kitco.com), Blanchard(www.blanchardgold.com), and JM Bullion (www.jmbullion.com). These firms offer a wide variety of newly minted coins, historical coins, and rare coins, as well as coins from different countries, such as American Gold Eagles, which are my favorite, South African Krugerrands, and Canadian Maple Leafs. You can choose from different weights, ranging from 1 oz. down to 1/10th oz. (and Kitco even offers 1/20th oz.).

There are also myriad ways to buy gold through ETFs or closed-end funds, including the SPDR Gold ETF (NYSEArca:GLD), which charges a 0.40% fee, and the iShares Gold Trust (NYSEArca:IAU), which charges a 0.25% fee.

There are also two other stocks that I prefer, the Central Fund of Canada Ltd. (NYSE:CEF) and the Sprott Physical Gold Trust (NYSEArca:PHYS).

U.S. Dollar: Going Up

The US Dollar Index (DXY) is an index that measures the value of the dollar relative to a basket of foreign currencies. The composition of the index is Euro (57.8%), Yen (13.6%), British pound (11.9%), Canadian dollar (9.1%), Swedish krona (4.2%), and Swiss franc (3.6%). As you can see, 70% of the index is tied to just two currencies – the Euro and the Yen.

The Dollar Index (DXY) broke out of a long-term trading range and started moving up sharply in mid-2014 until it broke a long-term trend line at 95 in December 2014. It has spent most of the subsequent period trading above this key level, signaling that it could trade much higher in the coming months.

Keep an eye on the DXY. You can track it on Bloomberg’s website right here. As of Q2 2016, it’s above 95 and likely to move higher, which would have massive deflationary consequences for global markets.

While the Fed has ended quantitative easing and began raising interest rates at the end of 2015, the ECB and the Bank of Japan are moving in the opposite direction, initiating huge new bond-buying programs to lower interest rates in their markets. That means Europe and Japan are dead set on cheapening their currencies against the dollar. As a result, the U.S. dollar will keep rising as global investors flee lower yielding currencies and flock to the higher yielding U.S. currency. That should push the dollar upward and further depress the euro and yen.

STRATEGY: BUY

You can buy ProShares DB US Dollar Bullish ETF (UUP), which closely tracks the exposures in the DXY. This ETF rises when the dollar rises.

Euro: Going Down

In mid‐2014, the Euro (as well as the Yen and other currencies) began to fall against the dollar as U.S. monetary policy began to diverge from those of other major central banks in Europe, Japan, and elsewhere. The Federal Reserve ended quantitative easing in October 2014. In contrast, the Bank of Japan and European Central Bank were about to double down on their versions of this doomed‐to‐fail policy, which they did in October 2014 and January 2015, respectively. They continued these efforts in 2016.

The Euro is likely to continue falling against the dollar.

STRATEGY: SHORT

You can sell short the Euro by buying ProShares Short Euro ETF (EUFX). This ETF rises when the Euro falls.

Chinese Yuan Renminbi: Going Down

Right now, China is facing serious pressure to devalue the yuan. China’s economy hit a wall in mid-2014 and since then, about $1 trillion of capital has left the country. The country’s $4 trillion of foreign exchange reserves has dropped to nearly $3.3 trillion as the authorities have spent hundreds of billions of dollars defending the currency. Of its remaining reserves, only about half are liquid, so it can’t continue to spend money at the rate it has to keep defending the yuan.

China is either going to have to impose stricter capital controls to keep money from leaving or stop spending its reserves to defend the yuan. If it imposes capital controls, wealthy people in China will get even more nervous about moving their money out of the country and redouble their efforts to do so. Such a move would also be a blow to Chinese view of itself as a global economic leader; but it may not have a choice. Either way, the yuan could move much lower than people expect.

But contrary to the opinions of many “experts” like Kyle Bass, China’s collapse will be a long, slow slide to oblivion, not a spectacular crash. The yuan is undoubtedly overvalued and will decline in value over time, but as tempting as it is to imagine a Chinese collapse, it simply isn’t going to happen quickly.

STRATEGY: SHORT

  • First, investors can short all emerging markets by selling the iShares MSCI Emerging Markets ETF (EEM).
  • Second, they can short the Chinese stock market by shorting iShares China Large-Cap ETF (FXI), which has traded between $52.85 and $28.81 over the last year and is currently at $30.20.
  • They can also short the iShares MSCI Singapore ETF (EWS).
Japanese Yen: Going Down

Japan’s government has no choice but to continue to weaken the yen in order to deal with the country’s terminal debt and demographic challenges. A cheaper yen will boost Japan’s export businesses. In addition, Japan’s corporations have become very competitive globally as a result of having to operate with an expensive currency for so many years. As a result, they are poised to generate strong profits if they can sell more of their goods under a weak currency regime.The yen is likely to decline more rapidly than the yuan despite the yen’s recent strength (and clearly that isn’t a speedy trade in itself). The yen has been a big disappointment to those (myself included) expecting it to drop against the USD this year as a result of Japan’s increasingly desperate efforts to weaken its currency and stimulate economic growth. Despite unprecedented efforts to ease monetary policy, the yen surged to an 18-month high by mid-April against the U.S. dollar. Not to be deterred, the Bank of Japan said it “will not hesitate to take additional easing measures in terms of…quantity, quality and the interest rate if it is judged necessary.”

I would maintain short yen positions, however, because the Japanese will continue their efforts to debauch their way out of insolvency. Their efforts won’t work, but they won’t stop trying.

STRATEGY: SHORT

  • Buy long-dated puts on CurrencyShares Japanese Yen Trust ETF (FXY).
  • Short the Japanese stock market by buying puts on iShares MSCI Japan ETF (EWJ).

Stay tuned for Phase 2 of this report, where I’ll explain how these major currencies pressure the minor ones – and how you can profit from those.

Sincerely,

Michael

23 Responses to “World Currency Profit Gameplan – Phase 1”

  1. Ronald Feltman

    Michael, why did you fail to mention Special Drawing Rights (SDR) as defined and used by the International Money Fund (IMD) as a sixth candidate currency for Phase I? The IMF basically exercises control over the “one world” economy and is perhaps the most important of all the other five currencies you mentioned!
    As you know, most of the “World” economic business utilizes this alternative “currency”!

  2. Where as currencies can be intrinsically associated with what they can buy, Gold is based on subjective cultutural and historical historical supply and demand. Gold and to a lesser extent cash are being rendered obsolete as an a means of financial transactions.
    Also, Gold supply is not controlled. Rather it is driven by demand. And the demand is subjective.
    There is no need for sovereign states to maintain gold reserves. The US has been off the gold standard for decades
    and surviving based on its purchasing power.

  3. Bob & Chris – “how Gold and the Dollar can both go up at the same time?” At the 1st of the article he says that he thinks the dollar will continue to lose value against gold. But the dollar will gain against the other paper currencies. Just as the dollar gains against 1 currency and loses against another in the Forex, he’s using gold as a currency also.

  4. It doesn’t matter if gold is “named” a currency or commodity so much as it is important to identify it’s value to investors. It doesn’t need to be an active part of financial transactions (like cash or digital money) in order to be considered an asset for investment purposes. Obviously if central banks have been buying gold in recent years they have identified it as a financial asset. The terms ‘subjective’ and ‘objective’ really have no meaning (as one person’s comment seemed to imply). Gold is as much a financial asset as real estate, even though the traded value changes continuously in the market. But there is no such thing as an “obsolete” financial asset, even though relative values of assets changes.

  5. It could be possible in case of a big crisis. Financials assets in foreign currencies, bonds, stocks, will be converted into financial assets in dollars, the US remaining the safe haven of choice. On the other end, liquid assets, cash and short term loans, issued in foreign currencies could be traded for gold. So both could theoretically rise in coordination.

  6. If “Japanese corporations…are poised to generate strong profits [with the projected weakening of the yen], why would we want to short [buy long-dated puts] the Japanese stock market [via EWJ] ???

  7. Elizabeth Burke, Esq. A subscriber to "The Credit Strategist"

    No one can know what will happen over several decades. Not even Michael Lewis. There
    is no way to know how to play forex ahead of the game. You have to master Forex and not blindly follow something written weeks, months or years before it happens.

  8. Do you really think your knowledge of the markets is better than Michael Lewitts.? Consider his track record and his Bio.? I spent 23 years on Wall Street and I’ll confirm that he is spot on.You can limit your losses as low as 10% if you want, but consider your gains. Look at Michaels profits on Valent.If that isn’t proof enough I don’t know what is.If you can’t handle losing 10% and are afraid of risk, then get the hell out of the market.The reason your scared is because your trading with your lunch money not a sizable Investment portfolio over $100,000.00. Keep the recomandations coming Michael. Your Aces in my Book.!

  9. I spent 23 years on Wall Street in Investment Banking and I know an Expert when I see one. Read his Bio twice. Look at his Gains on Valient and consider that he is one of many Highly respected Hedge Fund managers that are shorting Teslsa. Jim Chanos is one.If you don’t know who he is than your not a trader or Investment Professional.Rookies always complain. I never had a million dollar client that didn’t accept that there would be loses along the way , but minimal.The chronic complainers were always the small time investor. That’s why I raised my minimum investment to $100,000 If your trading with your Milk money than get out of the market.

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