Stay short in global financial markets this week or hold dollars and gold

The red lights are flashing in the global financial system with Moody’s imminent downgrading of top French banks just the latest in plausible rumors. European bank deposits at the ECB have soared as inter-bank lending has frozen up.

At the same time the FT noted that the correlation between to movement of big US stocks is at its highest level since Black Monday in 1987, the worst one-day loss for shares in history. The same thing was noted in the May ‘flash-crash’ last year.

Stay short

Stocks are moving together as a block, making a nonsense of stock picking. You just don’t want to own any shares in this environment.

Going short in financial markets has never seemed a brighter and more obvious move. Readers of the last ArabianMoney newsletter got a short course so-to-speak in how to use bear market ETFs to achieve this objective (subscribe here).

These shorting instruments compound like stocks and can show amazing gains when the market dips, unlike conventional single-stock shorts where gains can never exceed 100 per cent.

The US dollar is the other standout winner when stock markets fall turning shares into cash, and as the eurozone collapses into chaos as the unavoidable Greek default approaches. However, the dollar’s surge just compounds the losses of big US multinationals as their euro earnings take a pasting when translated back into dollars.

A surging dollar is also bad for commodity prices, so shorting industrial commodities through bear ETFs would also work as a short term strategy. What will happen to gold and silver prices in the short term is much harder to judge.

Flight to safety

Normally a rising dollar would depress gold prices but the correlation is far from absolute, particularly in the exceptional circumstances that we see today. The flight from the euro is surely also bolstering gold and silver prices as a safe haven, especially now that the Swiss franc has pegged itself to the falling euro.

The ArabianMoney has been arguing the case for dollars, precious metals and short ETFs for several months and as we now come towards what must be a capitulation climax in global financial markets that still looks the wisest strategy with diversification as always essential.

The devil in that strategy is the detailed spread of instruments and portfolio balance and we reserve that sort of consideration for subscribers to our newsletter who still need to use their own judgment to apply this to their own financial circumstances.