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In early June, I recommended a trade that would allow investors to make a triple-digit gain if they sold puts and bought calls on the Invesco DB USD Index Bearish ETF (NYSEArca: UDN).
Today, the puts are up about 66%, and so are the calls.
Those are good gains, and there's plenty of time for that trade to play out, too (so click here if you missed it the first time).
But let's be clear: This is the U.S. dollar we're dealing with here – this is a massive economic trend.
There are plenty of unique, low-risk ways to profit over the next few weeks and beyond…
Why the Dollar Is Sinking Now
The greenback had been rising against most foreign currencies since the end of the financial crisis. In fact, for more than a decade, the dollar had been the world's darling as the U.S. economy fared better than that of most developed countries worldwide.
Growth had been steady, unemployment low, and inflation hadn't reared its ugly head in a very long time.
The United States had been the world's envy – at least, its economy was – even as the pandemic began.
The novel coronavirus was slow in getting here, and when it did, it was pretty well contained outside the New York City Metro area and Seattle.
It was when the U.S. government encouraged states to reopen too soon that the pandemic accelerated once again, and the United States went from being admired for how we handled the crisis to the poster child for how not to deal with a pandemic.
It didn't help that the Fed went into full panic and pump mode, and Congress went on a budget-busting spending spree.
Now there are questions about how the economy will fare with the virus still running out of control. Many smaller businesses closed by the initial shutdown have been unable to reopen and are probably gone for good.
We still have massive, double-digit unemployment and there is no real plan to speak of for creating new jobs to replace the ones we just lost.
The civil unrest and chaos in the streets hasn't helped the dollar's looks, either. When your evening news looks like something out of a war zone with protests, riots, and political turmoil, it is hard to make the case that your currency should be the dominant mechanism of exchange worldwide.
The world has been aggressively selling the dollar for a couple of months now. The U.S. Dollar Index has fallen from a high of around 104 back in April to about 93.50 today. Along the way, the price action took out a critical support level at 96. Along the way, it also took out several key moving average levels, sending a clear signal that the dollar is entering a bear market against other major currencies.
The Long-Term Play: Income from Europe
The long-term trade to take advantage of this development is to buy global stocks. Global stocks do very well when the dollar is falling historically.
No need to get fancy – or risky – and chase emerging markets or small-cap stocks to capture the long-term excess returns of foreign stocks.
We can buy the bluest of blue-chip dividend-paying stocks – very liquid – and enjoy higher returns than U.S. stocks are likely to see as the dollar falls further in value.
We can gain an extra edge by using a heavily discounted closed-end funds (CEF) to buy international blue chips for less that their trading value.
Shares of First Trust Dynamic Europe Equity Income Fund (NYSE: FDEU) are trading at a 14% discount to the value of the fund's assets. That is almost double the three-year average discount, and we should see some narrowing as European stocks become more popular as U.S. assets fall out of favor.
Like the ticker says, the fund owns European blue chips.
The top holdings of the fund include Nestle SAS ADR (OTC: NSRGY), GlaxoSmithKline PLC (NYSE: GSK), Sanofi SA (NYSE: SNY), Vodafone Group Plc. (NYSE: VOD), and other large well-known global companies based in Europe. The top five countries represented in the fund are the United Kingdom, Germany, France, Switzerland, and the Netherlands.
More than 78% of the fund's assets are in those highly developed European nations. And note the presence of two leaders in the hunt for a COVID-19 vaccine.
The funds focus on dividends that will deliver regular cash flows to your account every month. The current yield is about 6.8%, which compares very favorably to most income-generating investments right now.
The combination of rising European markets, a narrowing discount to asset value, and monthly dividend payments can deliver a triple combination that adds up of high total returns during a period of prolonged weakness in the U.S. dollar.
In the Short Term: Own This High-Performing Miner
Gold miners are extremely compelling right now, none more so than the one I'm going to name in a minute.
The prospect of the Fed continuing to pump in money – with no plan to unwind in place – has made people all around the world skeptical of fiat currencies.
At times like this, they turn to gold and other metals as long-term stores of value, pushing the price of gold higher. We've already hit a new all-time high in gold, but the smart-money opinion holds this is just the beginning of a massive long-term rally in gold and gold miners.
Newmont Corp. (NYSE: NEM) is the largest gold miner, and it's been on an incredible run over the last year.
So, let's buy calls on Newmont for a short-term play on the falling dollar. With Newmont on the verge of breaking out to a new 52-week high, we can buy the NEM Oct. 16, 2020 $75 call options for less than $3, or $300 per contract.
Another breakout in gold could lift the stock to new all-time highs and give us a huge profit on our call options.
The risks of buying calls are well-known. Should NEM shares not reach $75 by Oct. 16, you would lose the full value of your investment.
But the recent pullback in this stock on Thursday has presented a new opportunity to jump in ahead of Congress' next round of stimulus. If, as seems virtually certain, the Fed and Congress continue to shower investors with free money, look for continued debasement to help drive up the price of gold and the underlying assets of gold miners.
The Bottom Line: No Bottom in Sight
The Federal Reserve has signaled it will continue – "no questions asked" – to provide whatever liquidity required to keep the nation afloat.
Other big central banks around the globe are also in a race to help companies avoid bankruptcy and reduce exposure to the global pandemic.
The ongoing pandemic has fueled unprecedented stimulus, and the dollar's debasement could still accelerate, threatening the greenback's status as a global reserve currency.
This could drive greater investment toward Europe and increase the demand the currency of last resort… gold. This is the safest, least expensive way to position ourselves in front of that trend.
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About the Author
Garrett Baldwin is a globally recognized research economist, financial writer, and consultant with degrees from Northwestern, Johns Hopkins, Purdue, and Indiana University. He is a seasoned financial and political risk analyst, with a focus on stocks, hedge funds, private equity, blockchain, and housing policy. He has conducted risk assessment projects for clients in 27 countries, and consulted on policy and financial operations for some of the nation's largest financial institutions, including a $1.5 trillion credit fund, a $43 billion credit and auto loan giant, as well as two of the largest Wall Street banks by assets under management.
Garrett joined Money Map Press as an economist and researcher in 2011, specializing in alternative strategies with an emphasis on fundamental and technical analysis.