Daily Gains Letter

A Way to Make Money as Central Banks Put Their Printing Presses into Overdrive

By for Daily Gains Letter | Feb 7, 2013

DL_Mohammad_070213It is no surprise that devaluation of currency seems to be the new norm these days. Central banks around the world are printing their currencies in excess amounts, sending its value downward. It appears as though central banks are in a race, where the country with the lowest currency value wins. Their reason for devaluing their currencies? To make their country’s products competitive—cheaper—in the global economy.

The central bank of Switzerland is working overtime to keep its currency from rising. It has printed more than $541 billion worth of Swiss francs in order to put downward pressure on the currency. (Source: Blackstone, B. and Wessel, D., “Button-Down Central Bank Bets It All,” Wall Street Journal, January 8, 2013, last accessed February 5, 2013.)

Japanese exports declined 5.8% in December 2012 compared to the same period 2011. The Japanese relies on its exports. So, what do you think the central bank of Japan is doing? The Bank of Japan has turned its printing presses one notch higher—it wants its currency value to decline outright. (Source: “RPT – Japan logs record trade deficit in 2012 – MOF,” Reuters, January 23, 2013, last accessed February 5, 2013.)

Below is a chart for the Japanese Yen Index, which compares the value of the Japanese yen to other major world currencies.


Chart courtesy of www.StockCharts.com

The Japanese yen has fallen significantly compared to other world currencies since the Bank of Japan started to intervene in the currency market. In early 2012, it was valued above 130; now it’s hovering around 109—a decline of more than 19%.

Keeping all this in mind, remember that the Swiss and Japanese central banks are not the only ones printing currencies; the major countries are involved in it as well—including Russia, Hong Kong, Brazil, Columbia, and Peru, just to name a few.

The U.S. Federal Reserve has already printed trillions of dollars, and it continues to print another $85.0 billion per month to boost economic growth in the U.S. economy—these actions, of course, are causing the dollar’s value to decline as well.

Fortunately, as bad as currency devaluation may be, investors can certainly reap some rewards from it.

Take a look at ProShares UltraShort Yen (NYSEArca/YCS), for example. This exchange-traded fund (ETF) provides the inverse return of the Japanese yen in U.S. dollars. In other words, if the Japanese yen falls by one percent, this fund increases by two percent. If the Japanese yen increases, the fund declines.


Chart courtesy of www.StockCharts.com

The ProShares UltraShort Yen was trading around $40.00 at the beginning of 2012; now it’s hovering around $56.00—a gain of $16.00, or 40%, per share.

There are always opportunities present in the markets, no matter what the conditions are. It just requires a little research. If currency devaluation continues to be the norm, then the prices of ETFs, which essentially short a certain currency, can rise significantly and benefit investors.

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