A Currency Trade for the Rally in Gold
Gold just keeps hitting new highs in this scary world. Here's how to use currencies to trade the rise.
It's scary out there, what with Washington in gridlock and the euro zone only narrowly averting disaster — for now. But if gold is any indication, fear can breed opportunity.
"You do still have a lot of uncertainty around the world," says Rebecca Patterson, chief markets strategist for J.P. Morgan Asset Management, Institutional. "People are looking for a refuge, and right now they don't feel really good about the dollar or the euro, so gold is one of the places they are seeking refuge."
If you don't want to trade the yellow metal itself, you can use currencies. Patterson pointed out to CNBC's Melissa Leethat the Swiss franc-euro pair tracks gold very closely.
"If we think gold can go higher, and I think it still can, you might want to consider being long the Swiss franc against the euro," Patterson says.
"The Swiss franc has gone a long ways already, so I wouldn't go crazy on this," she cautions. "But I do think if you want some hedge in a portfolio, if you want some protection in a portfolio, getting long Swiss franc here against the euro is not a horrible idea at all."
Patterson recommends buying the Swiss franc against the euro at 1.174 and looking for a move lower in the euro to around 1.12, with a stop loss around 1.20.
Greg Troccoli, a technical analyst with The Chart Lab, agrees that the general idea of the trade makes sense, but he recommends an entry around 1.20.
On that, you'll have to decide yourself. In the meantime, here's one other point to consider: China's central bank has only 1.6 percent of its reserves in gold, while the global average for central banks is 11 percent. Says Patterson, "There's a lot of wiggle room for central banks like China, like Saudi Arabia, like India, to add gold."
You can watch the discussion right here, starting at 8:29:
MULTI CURRENCIES vs The Dollar
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