Euro Gold: The Ultimate Crisis Hedge

To say Harry is passionate about the direction of gold, the dollar and the economy is an understatement. He’s willing, even itching, to have heated debates with anyone holding opposing views. It’s a riot to watch!

We’ve been steering investors out of gold (for the most part) and into the U.S. dollar, even as much of the mass media peddles the exact opposite approach. The difference in our analysis is simple: deflation.

Fiat currencies, like the U.S. dollar, tend to get a boost when massive amounts of debt are deleveraged. And, despite gold being a good store of value in times of inflation/hyperinflation, it loses value during deflationary environments. 

That said, if you’re itching to buy some yellow metal… there’s one way we’d suggest doing this. Buy gold in euros, not dollars. Let me explain…

By and large, gold is priced in U.S. dollar terms. But it can also be priced in euros. Here’s a chart of the two quotes: gold in dollars (yellow) and gold in euros (green).


As you can see, these two quotes mostly move together. And any divergence between the two is easily accounted for by shifts in the exchange rate between the U.S. dollar and the euro.

But buying gold in euros is the ultimate “crisis hedge” because:

  1.  Gold tends to spike higher leading into global financial crisis, and
  2.  The euro tends to drop in times of crisis as investorsflee to the dollar safe haven.

If gold goes higher, and the euro moves lower, a position in euro-denominated gold would enjoy a “double whammy” boost.

If this strategy resonates with you, you’ll need to build a “synthetic position,” as there aren’t many investment vehicles that allow you to buy euro-denominated gold directly. To do this, simply buy a gold instrument (gold futures or a gold ETF, like GLD) and simultaneously sell short an equal dollar amount of a euro instrument (euro futures or a euro ETF, like FXE). To accomplish the “short euro” side of this, without selling short, you could also purchase an inverse euro ETF, such as EUO (but only buy half the amount, as this ETF is leveraged 2x).

This trade should perform best as crisis fears are climaxing. It’s a great hedge heading into the crisis, but you won’t want to hold it through ‘til the bitter end. I’ll keep an eye on this and write to you again once the tide has turnrned.