Written by Sara Nunnally, Editor, Inside Investing Daily, insideinvestingdaily.com
Gold prices have slid. For smart traders, it has created an opportunity. The currency war is far from over.
It took gold prices nine months to go from $1,400 an ounce to $1,900 an ounce, but it’s only taken prices a month to fall $200.
Look at the action over this past year…
Gold prices have fallen slightly below their long-term uptrend. But this might not be a bad thing. In fact, it could be a great opportunity. Look at this chart:
This chart shows the price of gold over the past 10+ years. See that blip back in ’08? That’s the financial crisis. And after that, the price of gold went ballistic, climbing 153% in two and a half years! I don’t think even the hard and true gold bugs believed gold could move at this pace.
In 2008, we had a massive financial crisis that sent investors running to cash and ultra-safe bonds. This sent the U.S. dollar through the roof. Demand for greenbacks made their value increase, despite all the printing that the Federal Reserve was doing.
Now, in 2011, the euro is crashing hard. The European debt crisis is having the same effect on the U.S. dollar — giving it a much higher value.
As a result, dollar-denominated assets, particularly gold, are dropping in price. Never mind that the U.S. dollar is only up because folks have such little faith in the euro.
So what does this mean for the future price of gold?
Things are going to stay crazy — with a lot of price swings — until one of two things happens: The price of gold drops far enough to stimulate physical demand, or the currency war ends.
Here’s what’s happening. The Federal Reserve has agreed to provide cheap dollar loans to inject liquidity into the European market. What’s been happening is that folks are dropping the euro and picking up the dollar.
Look at the action between the CurrencyShares Euro Trust (FXE:NYSE) and the PowerShares DB U.S. Dollar Index Bullish (UUP:NYSE) over the past six months. The U.S. dollar is creaming the euro.
On Tuesday, I told my Macro Trader readers to take 33% profits on half of our position playing FXE put options. But the potential for profits was much greater. At the end of the day, they could have walked away with 43%, and we’re still holding the second half with 47% gains as of Thursday morning.
This sets up a unique idea for gold investors.
Gold prices are no doubt in a bit of a slump. I see this as a buying opportunity, but in all honesty, we don’t know when the market is going to turn back to gold.
That means investors can take advantage of the currency war happening right now. As long as the euro continues to be shaky, the U.S. dollar is going to maintain its value. Things like gold will struggle to move higher, and will likely fall in price.
But by investing in currencies, you can balance those price movements.
I think the FXE has some more downside before all is said and done, and could provide you with a nice gain over the next three or four months if you use put options to bet the ETF will fall. That’s why we’re still holding the second half of our FXE put position in Macro Trader.
In all, I think gold prices are starting to look attractive again. We’ve seen price support at $1,300 back in January, $1,500 back in May, and $1,600 in September.
This last is the level we just broke. If $1,600 doesn’t hold, I’d be a strong buyer at $1,500.
Editor’s Note: We are one headline away from a massive spike in gold prices. We are ignorant to believe an age-old war between the Sunnis and the Shias will fade away simply because we lowered our flag and went home.
The sad truth is, we are in worse shape now than we were eight years ago. And if what we think is about to happen becomes reality, it is great news gold investors. If you want the in-your-face details, you need to read my urgent report on the situation.
