How to Get the U.S. Dollar to Stop Stealing Your Commodity Profits

currency_silverIt’s hard to talk about the devaluation of the U.S. dollar after Memorial Day, especially when I know that my grandfather, who served in the Navy during WWII, and millions like him fought hard for America to become the greatest free nation in the world.

To be a capitalist, you must invest where your money will grow and put aside at least some of your pride and beliefs. I am not suggesting breaking your moral code, but the world is a much different place than it was during WWII. We have to accept these changes, both good and bad… and profit from them!

The Trade of the Year

The gold and silver bugs are coming out of the woodwork after the recent price pullbacks. Some experts believe there is still major upside potential. And there is a large contingent of investors making the case for hyperinflation, which could send the metals (gold specifically) soaring.

Smart Investing Daily rode the early waves of the precious metals party when we began recommending these commodities this time last year. Along the way up, we pointed out some points of support and resistance to help guide you. You can check out our archives here.

Now we’d like to tell you about a more profitable way to get long gold or silver. This trade I am about to show you has been an extraordinary winner for me. If you think the U.S. dollar will continue to weaken along with a rise in gold (or silver), keep reading.

The method I am about to show you will make you more money if these precious metals move higher and the U.S. dollar moves lower, but keep in mind if the opposite happens, you will lose more money than buying gold or silver alone.

This method isn’t just for hedging your portfolio, or for added investment safety. This trade is designed for profits, so you should judge if the risk is right for you.

How to Own Gold in Euros

Commodity experts like Dennis Gartman have been long gold in euros for some time now and it has paid off handsomely for them. It doesn’t mean you have to fly to Europe and open a bank account and deal with all sorts of red tape and costs. There are a couple ways to do it and I am going to show you one of them.

One of the easiest ways to own gold is to buy shares of the SPDR Gold Shares ETF (GLD:NYSE). The GLD is one-tenth the price of gold minus the fees they charge. It is a semi-efficient and easy way of owning gold without taking delivery of gold bars and having to deal with transaction and storage costs of that gold.

When you buy GLD using American dollars, any rise in the price of the ETF could be reduced by the amount that our dollars are decreasing (caused by inflation). Buying gold (GLD) by itself can be a hedge against inflation because it tends to rise as the U.S. dollar weakens against other currencies. But buying gold (GLD) and getting long another currency like the euro can protect you even further.

To “own gold in euros,” you must not only buy gold, but also at the same time buy something that will get you long euros and short dollars.

FXE in Black, GLD in Orange — Daily Chart (note how they have been moving in tandem)
FXE Chart
View larger chart

Getting Long the Euro Versus the Dollar

The professionals on Wall Street have all sorts of neat and complex tactics they use to get long the euro and gold at the same time. The trick for us is to keep it simple, cheap and keep the ratios right.

The Rydex CurrencyShares Euro Trust ETF (FXE:NYSE) is one of a couple of ETFs that trades like a stock and can give us access to how the euro moves versus the dollar.

Basically the FXE closely mimics the exchange rate between dollars and euros times 100. So if 1 euro would get you $1.45 in U.S. dollars, the FXE should be trading around $145. If that exchange rate drops to $1.40 euros for every dollar, then the index should drop to $140, which would be a change of $5.

So if you buy shares in the FXE, you are getting long euro and short dollar and will profit if the dollar gets weaker versus the euro.

Here Is Where It Gets Tricky

For every one (1) share of the FXE you buy, you are risking one hundred ($100) on the euro/USD exchange rate. Buying one share of the GLD is only going to cost you one-tenth the price of one ounce of gold. The thing to remember is this: With both products, even with the ratios, they will return roughly the same amount on a percentage basis.

The question is, how many shares should you buy of each to get the right exposure?

To keep it simple, you would simply take the DOLLAR AMOUNT invested in the GLD and divide it by 100 to figure out the number of SHARES of FXE to buy. Here’s what that looks like: For $10,000 worth of GLD, you would buy about 100 shares of FXE ($10,000/100=100).

That $10,000 would get you about 67 shares of the GLD at current prices. So if you bought those 67 shares and 100 shares of the FXE, you are essentially getting long gold in euro terms! Cool, huh?!

That means you’re not going to lose your gold profits when the dollar loses value.

The thing to remember here is that you are effectively exchanging your dollars for euros; this is why I was focused on the dollar amount invested in gold. Keep in mind that there are fees and risks associated with both of these financial products, and just because this trade seems cool, it can still lose money.

Just like every investment, you should see where it fits in your portfolio, and how much you’re willing to risk on it.

If you want to buy silver in euro terms, you can use this same method with the SLV (silver ETF).

There are certainly risks in the eurozone now that need to be worked out, not to mention that the International Monetary Fund (IMF) is still searching for a new leader. Former IMF president Strauss-Kahn’s recent debacle also threw a monkey wrench into the French presidential race and perhaps the country’s economic future. A disaster in Europe could cause the FXE to fall in value.

But if the tide turns and the U.S. starts to see big inflation numbers, you’re now armed with a way to go long gold and keep all your profits.

Whatever you decide to do, always remember that there is usually more than one solution to a problem; it’s up to us to find it. Please execute proper due diligence before investing in anything!

Editor’s Note: Speaking of commodities, Safe Haven Investor editor Kent Lucas has a valuable silver tip for you. One top silver company is poised to make a major announcement about their newest mine any day now. If you own stock on the day results come out, you could make 81% in a matter of hours. Find out how to cash in.

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