How to Profit from Every Major World Currency… Before Central Bankers Kill Them

By my count, there are no less than 180 currencies circulating as legal tender in the world today. There are several dozen alternative and digital currencies in play, although how useful they are remains debatable.

But for the time being, just five currencies – the Big Five – fuel the global economy. They are, in order:

  • gold (anyone who tells you gold is a commodity and not a currency is an idiot – probably a dangerous one, like Ben Bernanke);
  • the U.S. dollar;
  • the euro;
  • the Chinese yuan; and
  • the Japanese yen.

These are different currencies, of course, but no currency is an island unto itself; nothing operates in isolation. Each of these currencies impacts and pressures the others, along with a whole host of “minor player” currencies, like the Australian dollar or Swiss franc.

I won’t sugarcoat this: In the long view, central bankers run amok will eventually succeed in their collective Don Quixote-like quest of destroying the value of paper money, leaving gold as the only currency left standing – or worth owning.

Until that day (which just might get here sooner than you think), these currencies will go up and down relative to one another in a kind of domino effect.

And that’s precisely where the most profitable trades are…

These Currencies Are Going to Rise

The same central bankers that seem hell-bent on destroying paper currency are in part responsible for the near- and intermediate-term movements of their currencies. There are other reasons why currencies fluctuate, of course, but monetary policy (or lack thereof) is a huge catalyst for movement.

Let me show you which currencies I think are heading up and a how to profit from that.

Currency Buy Recommendation No. 1: Gold

Gold has a bright future ahead of it. It sits at around $1,255 an ounce today, but it’s not unreasonable to expect it to hit $4,000 to $5,000 an ounce the next few years and decades. It is the ultimate 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, like 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.

currency

What’s more, 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 quite simply protect you from what they are doing; against the inflation that is destroying the value of the currency in your wallet right now, as well as the value of your stocks and bonds that are denominated in those paper currencies.

There are a number of ways to own gold.

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The best way is to own physical gold. Personally, I like coins, which can be purchased from a number of reputable dealers. They’re more convenient and easier to store than bullion.

Dealers like Kitco, Blanchard, and JM Bullion offer a wide variety of newly minted coins, historical coins, and rare coins, such as my favorite, American Gold Eagles. They also deal in coins from different countries, like South African Krugerrands and Canadian Maple Leafs. You can choose from different weights, ranging from 1 ounce down to 1/10th ounce (and Kitco even offers 1/20th ounce).

There are also myriad ways to buy gold through exchange-traded funds (ETFs) or closed-end funds, including the SPDR Gold ETF (NYSE Arca: 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 (NYSE Arca: PHYS).

Currency Buy Recommendation No. 2: The U.S. Dollar

The U.S. 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 weighted with 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. As of Q4 2016, it’s above 97 and likely to move higher, which would have massive deflationary consequences for global markets.

While the Fed 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.

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

These Currencies Are Set to Fall

As surely as gold and the dollar will rise, these major currency players are going to fall. As always, unless otherwise noted, puts are my preferred way to make short-side profits – they allow you to tightly manage your risk exposure.

Currency Short Recommendation No. 1: The Euro

Eurozone conflict

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’ve continued these efforts in 2016 and are likely to do so for the near future.

That means the euro is likely to continue falling against the dollar.

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

Currency Short Recommendation No. 2: Chinese Yuan

Right now, China is facing serious pressure to devalue the yuan. China’s economy hit a wall in mid-2014 and since then, more than $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 their continuing ability to move their money out of the country - and redouble their efforts to do so. Such a move would also be a blow to the 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.

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.

This is an interesting opportunity. There’s no easy way for Americans to short the yuan, but you can quite easily make money from the knock-on effects of its decline.

First, investors can short all emerging markets by short-selling the iShares MSCI Emerging Markets ETF (NYSE Arca: EEM).

Second, they can short the Chinese stock market by shorting the iShares China Large-Cap ETF (NYSE Arca: 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 (NYSE Arca: EWS).

Short Recommendation No. 3: The Japanese Yen

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.

global currency

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 dollar 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.

Here’s what you can do about it.

Buy long-dated puts on CurrencyShares Japanese Yen Trust ETF (NYSE Arca: FXY).

Short the Japanese stock market by buying puts on iShares MSCI Japan ETF (NYSE Arca: EWJ).

Michael Lewitt is one of the most talented investors in America. He’s also one of the most private individuals we’ve ever known and rarely makes public appearances. But, for the first time, Michael is going “off the record to reveal a new way to find stocks that have a 94.5% chance of working in your favor... and could net you an easy $313,000 in a matter of months. You may disagree with his approach, but you can’t deny its millionaire-making power

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About the Author

Prominent money manager. Has built  top-ranked credit and hedge funds, managed billions for institutional and high-net-worth clients. 29-year career.

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