Building A Strategy For Navigating The Rapidly Changing Euro In 2012 (VGK, EUO, GLD, GDX, GDXJ)

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December 28, 2011 5:31pm NYSE:EUO NYSE:GDX

Kevin Kerr: This has been a tumultuous and challenging year for traders. Most are happy to see it go. So as a new year approaches, it’s a good time to reflect and plan on how to protect yourself while profiting from the ongoing turmoil and uncertainty.

And almost nowhere has seen more uncertainty in 2011 than the euro zone.

Plagued with problems in almost every nation in the union, the EU faces formidable hurdles in attempting to stay together and grow the single currency.

The dream of a united Europe (NYSEARCA:VGK) and the utopian concept of one currency, borderless trade and commerce, as well as legal and immigration issues, was a noble yet unrealistic dream. Now all of that is painfully apparent.

Strange Bedfellows

The economic misery that has ensued since the euro zone was developed has far out shadowed the benefits, in my opinion. Sure many things have been accomplished and improvements have been made, but at what cost?

The end result of any “experiment” is really all that matters. And the end result right now is that we have instability, fear, poverty, high borrowing costs, a weak currency, and strong talk of a breakup.

Not exactly a successful venture by any measure.

The primary problem with this entire undertaking is that the cultures and history of the various EU members are vastly different. The idea that many of those barriers could or even should be broken down was misguided. What works in Greece, clearly doesn’t work in Milan or Dublin.

The big losers are small responsible countries, like Estonia where I live that has just a 6.6 percent debt-to-GDP ratio. Compare that to France’s current debt of around 85 percent.

While I don’t think the euro or the euro zone are going to disappear altogether, some big changes are afoot. And there are several scenarios you need to look at for protection and opportunities in early 2012.

“Amat Victoria Curam” Victory Loves Preparation!

Every analyst, including me, loves to give their predictions for the coming year. Although today’s predictions give me little joy.

Let’s face it, the euro is going to change dramatically. And twelve months from now we are likely going to be looking at a very different map of the euro zone and countries that use the euro, than we see right now. The question is what will that map look like?

Nobody knows for sure. But some things will most certainly happen that are very clear to me …

I put the chance of some countries leaving the euro zone in early 2012 at 70-75 percent, in line with many other analysts. I think when that happens a ripple effect could cause some immediate activity, none of it very good.

I think almost immediately a run on the banks in the country leaving would be swift and painful. Savers would rush to put their money into a core euro country, which would bring down the departing country’s banking system overnight.

As a result companies and private households would lose access to loans and their cash. ATMs would dry up. Fear and panic would cause social unrest, even riots similar to what we’ve seen in Greece, Italy and elsewhere. And don’t expect governments to come to the rescue — they’re bankrupt! In addition, financial markets would deny them access to funding.

Let’s take France for example …

Suppose they decided tomorrow to pull out of the euro and return to the franc. It’s been discussed very seriously, so this isn’t some fantasy. Many experts, me included, agree that the franc once re-introduced would depreciate between 30 percent and 50 percent, which would cause the French government’s debts to explode even higher.

In that scenario, France would have to scramble to deal with exploding debt and a weak currency. The depreciation would lead to imported inflation and trigger widespread strikes and union demands for compensation, which in turn would set off a hyperinflationary spiral.

Gold’s BIG Move Is Yet to Come!

This could very well be the tipping point for a flight to gold as the safe harbor from hyperinflation. Sure gold at $2,000 is impressive. But if this scenario comes into play, gold prices could double. And it all rolls downhill.

So as the number of banks shutting their doors multiplies in Southern and Eastern Europe, you can expect the downfall of the core northern EU countries. That’s because they have lent less stable countries large sums of money over the years.

Of course the belief then was that the monetary union would last forever. Clearly that’s no longer the case. And the widespread impact when the first country leaves the euro will be devastating.

I know the picture isn’t pretty at all …

Panic, bank runs, capital abroad at a standstill, exploding unemployment, surging prices and declining currency values, combined with widespread government defaults, virtual isolation from international creditors and markets, resulting in the sort of socioeconomic nightmare we think of when we remember the Great Depression, and even that may be mild in comparison. The rioting and public anger may be enough to descend some of these countries, like Greece, into martial law.

Fortunately, there are ways you can take advantage of Europe’s problems. You could …

  • Short the euro or use an ETF like the ProShares UltraShort Euro ETF (NYSEARCA:EUO). This inverse fund is designed to rise 2 percent for each 1 percent drop in the euro.
  • Look at hedging with gold (NYSEARCA:GLD). Bullion bars, coins and numismatics, and of course options on futures are another alternative.
  • Investigate key mining stocks (NYSEARCA:GDX), which are what Sean Brodrick and I seek out for our Global Resource Hunter subscribers.

As we ring in the New Year, we’re going to see major changes ahead in the EU and who uses the euro. So the best gift you can give yourself is to protect your wealth and look for opportunities to profit from what is inevitably coming.

Best wishes for a prosperous and Happy New Year!

Written By Kevin Kerr From Money And Markets

Money and Markets (MaM)is published by Weiss Research, Inc. and written by Martin D. Weiss along with Nilus Mattive, Claus Vogt, Ron Rowland, Michael Larson and Bryan Rich. To avoid conflicts of interest, Weiss Research and its staff do not hold positions in companies recommended in MaM, nor do we accept any compensation for such recommendations. The comments, graphs, forecasts, and indices published in MaMare based upon data whose accuracy is deemed reliable but not guaranteed. Performance returns cited are derived from our best estimates but must be considered hypothetical in as much as we do not track the actual prices investors pay or receive. Regular contributors and staff include Andrea Baumwald, John Burke, Marci Campbell, Selene Ceballo, Amber Dakar, Maryellen Murphy, Jennifer Newman-Amos, Adam Shafer, Julie Trudeau, Jill Umiker, Leslie Underwood and Michelle Zausnig.

This investment news is brought to you by Money and Markets. Money and Markets is a free daily investment newsletter from Martin D. Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Dr. Weiss is a leader in the fields of investing, interest rates, financial safety and economics.

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