Gold is 2016’s top-performing asset to date. At current prices, it’s up about 19%, while the S&P 500 has earned a paltry 1.6%.
Gold is the world’s oldest medium of exchange, and unlike currencies, it can’t be created by central banks. In fact, its finite supply is why developed countries abandoned the gold standard last century.
But massive central bank intervention in credit markets over the past decade make it imperative that prudent investors hold some gold in their portfolios to insure against potential currency crises.
That’s why it is recommend to hold between 1-5% of your portfolio in this safe haven.
But as you likely know, buying gold while the value of the dollar rises can be dangerous to your wealth. And we believe the U.S. dollar is going to outperform all other currencies for another year or two.
That’s because America is the only major economy raising interest rates. That makes our currency very attractive to foreign buyers.
But this makes buying gold tricky…
Because the price of gold is quoted in U.S. dollars, as the dollar rises, the price of gold goes down… since it takes more foreign currency to buy the same amount of dollars.
And as gold gets increasingly more expensive to foreign buyers, it can cause gold prices to drop or stagnate. So if the dollar continues rallying, you’re likely to lose money buying gold.
But our fundamental thesis remains intact, investors need to hold some gold in their portfolio as a form of insurance against financial chaos. We just want to do so in a way to avoid losing money.
That’s why we recommend a “pairs trade” as a way to hedge gold purchases. We want to buy gold, while shorting the Japanese Yen – known as a ‘long gold and short Yen trade.
Now, the yen has fallen 17% against the U.S. dollar since 2013. And until the Japanese people wake-up to the failure of “Abenomics,” it will continue to fall.
This is because Japan is an “export economy.” The country benefits from a weaker yen, which makes its exports cheaper to other countries, like the United States. So Japan will continue to devalue the yen to boost Japanese exports.
And for us, we can take advantage of this trend and use it to protect our gold purchases.
First, we want to take a long position in gold. But we want physical gold – not the ‘paper gold’ of mutual funds or ETFs. Those are nothing more than IOUs for future gold payments, and in a currency crisis, may not be available for redemption.
Instead, we want to have physical gold. But that poses problems for most investors: finding reputable gold bullion dealers and the subsequent storage of the gold.
Thankfully, there’s an alternative…
Sprott Physical Gold Trust (NYSE Arca: PHYS) provides investors a convenient way to buy physical gold from the convenience of their online brokerage account. Better yet, you don’t have the hassles of worrying about storage, coin premiums, or finding a reputable broker.
It holds all of its assets in physical gold bullion—and stores it securely in a third-party vault in Canada. In other words, Sprott buys physical gold and then stores it in giant safes.
The physical gold is periodically inspected and audited. This means you can be certain it’s actually there (unlike some other gold funds).
And as an investor, you can opt to take delivery of your gold anytime, as long as the amount you want is greater than Sprott’s minimum redemption amount.
You can even buy it and hold it in an IRA—or a Roth IRA. If you hold it in one of these accounts, your capital gains won’t be taxed.
It’s the best way to buy gold and actually own the physical metal. All while protecting your portfolio from the currency wars being waged by the world’s central bankers.
And if you ever decide to sell in a taxable account, you are only taxed at 15% (or whatever your capital gains rate is)—not the higher 28% rate at which most coins and ETFs are taxed.
To execute the second half of this trade, we recommend you buy an “inverse” Japanese fund that goes up in price as the Japanese yen goes down in price. The name of the inverse Japanese currency ETF is called ProShares Ultrashort Japanese Yen ETF (NYSE: YCS).
The fund actually generates about twice the “inverse” return of the Japanese yen against the U.S. dollar. That means if the yen drops by 25% against the dollar, this fund will return approximately 50%.
Based on economic reports originating out of Japan, we believe the fund has the potential to increase another 50% over the next two years as the yen declines by another 20-25%. That gives us a price target of $117.33 (from about $78 today).
So, what’s the takeaway of all this? Well, we get to invest in the safety of gold, without worrying about a stronger dollar. It’s the best of both worlds.
Now, to be properly hedged, you want to own an equal amount of PHYS and YCS. For example if you want to own $5,000 worth of PHYS, but you want to “hedge away” your dollar risk, you would need to buy $5,000 worth of YCS as well.
No matter the amount you want to invest, so long as you own an equal amount of YCS, your currency risk will be fully hedged like a pro.
Best of all, you’re immune to the craziness of central bankers.