The Attack on the Dollar

The greenback is finishing one of its worst weeks in recent memory, and gold is setting all time highs every day this week. The gyration in the dollar is looking more and more like a concerted effort on the part of competing market forces.

On one side, you have the purported cabal of OPEC, the Russians, and the Chinese making noise about no longer using the dollar to denominate oil transactions. This is nothing new. Saddam Hussein was making similar moves before the U.S. invaded Iraq, and many speculate that his desire to move to the Euro was the prime motivator behind the invasion.

On the other side, you have the countries who would be negatively impacted by the devaluing of the dollar. To wit, countries as widely varied as Thailand, Malaysia, and Taiwan ft.com/cms/s/0/1e894c54-b40f-11de-98ec-00144feab49a.html">all stepped in this week to shore up the dollar. China's decision to re-peg the Yuan to the dollar is viewed as an aggressive attack on competing countries' exports in the region.

Over the short term, it is difficult to predict which market force will prevail. However, over the long term it is all but inevitable. The Federal Reserve has painted the dollar into a corner from which there is no escape. The question is not if oil will someday be denominated in something other than dollars, but when. When some of the coolest heads in the business are quietly predicting $1,500 an ounce gold (a near-50% increase from its all time high this week), it doesn't take a rocket scientist to figure out why.

The stimulus has failed. We have an economy awash in cheap dollars, yet real unemployment figures are approaching 20%. As a country, we can't pay our bills. And that's not something the world is likely to ignore. The Fed has interest rates at 0%. Where can they go from here? Is the Fed going to start paying people to come pick up barrel-loads of money?

So, how do you profit from the situation over the long term? Here is my strategy (full disclosure: I own both these securities at lower prices). First, buy UDN. UDN is an ETF that acts like a reverse-index on the U.S. dollar, meaning that when the U.S. dollar drops UDN increases in value. Much less volatile than the futures, and with no margin requirement, you can buy UDN and sit on it until the cows come home. Until a radical shift in the fiscal policy of the U.S. occurs, it will be a safe bet.

The second strategy is a bit riskier, but with even greater upside. Buy gold options. Again, avoid the futures unless you really know what you're doing, because a bad day can really bite you in the ass margin-wise. The options are still risky, but your risk is limited to the amount you invest. You can either buy futures options, which pay you $100 for every $1 gold increases above your strike price, or you can buy stock options on GLD, which is what I've done. If you're afraid of options, you can just buy straight GLD, but the leverage is nowhere near what you get out of the options. I own December Calls, but you may want to go out even further.

And here's the good news, kids. The dollar is up strongly so far today in the FOREX market after Bernanke came out and blatantly lied about having the ability and the tools to stop the bleeding. This could provide an excellent entry opportunity. If the dollar is up and gold is down, you can get into both sides of the trade cheaper than you could have yesterday, and maybe all week.

Those who know me know that I don't make specific recommendations often, but I think this is some of the easiest money you'll ever make. As long as Obama is determined to play Roosevelt to Bush's Hoover, smart money bets against the U.S.

Sorry for the length of the post, and good luck.