How to Play the Irish Bailout

Tweet   

It’s one of those situations in investing that often defies logic - and leads to big opportunities. When the majority of investors become convinced that a trade can only go one way, well, it often doesn’t.

And as I’ll show you, there can be easy gains to be had when you understand this.

For this example, I’m talking about the U.S. dollar.

You’ll probably recall the vicious downtrend the dollar entered in the two months leading up to Ben Bernanke’s second round of quantitative easing.

Investors were convinced that QE2 would pump a ton of cash into the system, thereby diluting (destroying) the dollar’s value. So, stocks and commodities started running higher, pricing in the dollar’s falling value.

Bonds also rallied.

But a funny thing happened on the way to the dollar de-basement. Once QE2 was announced, the dollar started to rally, and the long bond sold off.

The dollar was clearly not following the script. And what had been one-way trades - like gold, silver, bonds - started selling off.

I’ve heard the situation likened to what happens when too many people move to one side of a boat at sea. The boat lists and may capsize. In investment terms we can understand this is what happens when there are no more buyers left to enter a position.

Gold, which had run to a new high above $1,430 an ounce fell 6%. The long bond, as measured by the iShares Barclay’s 20+ Year Treasury ETF (TLT), fell from $106 to $94.

Now, the dollar’s case is particularly interesting. Because the dollar is not valued in a vacuum, but rather against other currencies like the euro, it often takes some news event to catalyze the market’s predisposition.

And the currency market got that catalyst in the resumption of debt problems in Ireland. The euro started falling as investors started pricing in the possibility that the European Union could collapse.

Now, as an aside, I understand it may seem far-fetched that the EU could simply collapse. But Germany threatened it before the Greek bailout was finalized. And even in the latest case with Ireland, we heard that at least one EU member nation was none too happy about having to bail out a weaker member.

It’s not surprising that traders would trim their euro holdings. After all, you sure don’t want to be the one holding euros if the EU dissolves. That would be as embarrassing (and painful) as holding banks through the financial crisis.

It’s true, Wall Street often goes into “sell first, ask questions later” mode.

So anyway, the net result of this was a surprising rally for the U.S. dollar. Now, it’s certainly a worthy endeavor to discuss how particular situations seem to find a catalyst. In this case, Ireland’s debt problem weren’t unknown. And it’s probably more than simple irony that brought these issues to the fore right when the dollar was hitting support in extreme oversold territory.

In fact, the old saw that the market’s job is to make as many investors appear foolish as possible was coined to describe exactly this situation.

But we’ll have to save that discussion for later, because I told you there was a profit opportunity here, and I’m sure you’d like me to get to the point.

And the point is that any large macro trend will correct, or reverse, at times. But that doesn’t mean the trend is done. It’s simply washed out some longs and created an opportunity for new buyers.

In my opinion, that’s exactly what’s happening with the weak dollar trades right now. And chief among them is precious metals.

Now let’s turn our attention to the U.S. dollar-euro chart. It’s a 2-year look at the dollar. Daily Profit readers are familiar with this chart...   

What we see here is that the dollar has rallied close to a support/resistance point. In fact, it’s already moved incrementally lower. And that move has coincided with a rebound for precious metals.

And we can see that the Gold ETF (GLD) is bouncing of its 50-day moving average...

So, if you’re looking for an entry point to catch the next rally for precious metals, this looks a good one.

Now, one more thing. Many investors may not know it, but silver prices are outperforming gold prices this by approximately 35%. There are several reasons for this, one of them being that silver has industrial uses (like solar panels) as well as “store of value” uses.

So for my money, silver is the place to be. And I’d like to tell you about a silver stock I’ve recommended in my Small Cap Investor PRO. I first recommended it at $3.45 per share in June. It’s been as high as $7 recently, but backed off to the $6 area when the dollar rallied.

I think it’s gearing up for a run to $9. That’s a 50% gain from current levels for investors getting in now.

Even better, I’m offering a brand new, 1 oz. Silver American Eagle coin to all new Small Cap Investor PRO subscribers who sign up today using the link below. So if you’re ready to profit from silver in two ways, please, CLICK HERE.

*****As always, I want to hear from you. Write me at dailyprofit@wyattresearch.com