Continuing to navigate through our trading playbook and constantly looking for unique opportunities to exploit, it remains clear that the U.S. economy has taken an unprecedented hit but you have to ask yourself, “who has been hit worse and who might not economically recover from this?”
Remembering back to the 2008 financial crisis, there was a focus on the four main European economies (Italy, Spain, Germany and France) and the impact the crisis played on debt to GDP ratios. Four countries within this (Portugal, Italy, Greece and Spain) known as the “PIGS” had gone on unsustainable paths requiring massive policy and austerity measures to provide stability to the global economy.
Now I’m not saying Europe did anything wrong this time around, as this virus has affected us all, but I believe that from a Euro area viewpoint, the ECB will ultimately need to double the size of the economic bailout package over the coming months as funding needs and fiscal responsibilities become clearer. The Pandemic Emergency Programme (PEPP) will need to add “Fallen Angels”, which are companies that’s credit ratings have fallen into the sub-investment category. This will do two things: it will further extend the lives of zombie companies and cause GDP to remain below pre-crisis levels for multiple years to come. Once the expansion of the program weighs in on the Euro currency itself, we should see a precipitous decline similar to that of July 2008 where the Euro went from 1.5985 (downward blue arrow) to 1.2326 (upward blue arrow) just four months later in October.
During this time, we saw gold futures in the U.S. sell off from $989/oz down to $681/oz. because the U.S. Dollar appreciated, and the Euro Currency declined.
Feeling that we had the idea correct and not getting the results we wanted, we were left to ask ourselves, “was there a better way to play it?” Therefore, from a tactical standpoint and an intermediate term perspective; Gold in Euro terms may be the most rewarding way of holding it.
Most will argue that all central banks are printing like mad and I cannot agree more, but given the size of the economic downturn, the ECB is far behind the stimulus curve. Once policy measures are stepped up over the coming months, the chart pattern of Gold in Euro terms should continue to outperform. What we are trying to do is diversify away from being the victim of currency fluctuations and potentially benefit from a declining Euro and rising Gold price as seen in the chart below.
There are two important events that we must pay attention to next week that will play a role in the price of Gold and the Euro currency. First, on May 5th the German Constitutional court is scheduled to give its verdict on QE and second is the Eurogroup meeting scheduled for May 8th.
From a trading perspective we have been using multiple strategies to try and take advantage of the expected long-term price appreciation in the precious metals markets. If you are unfamiliar with strategies involving futures or options, we at Blue Line Futures are here to help.
PHILLIP STREIBLE Chief Market Strategist www.bluelinefutures.com Main: 888-441-8555 Direct: 312-858-7303 Fax: 888-370-2221 Blue Line Futures LLC 141 W. Jackson #2845 Chicago IL 60604
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