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Trading Strategies in the Next Global Economic Downturn

| March 8, 2024 | By

2020 was a pivotal year in finance, with markets around the world exhibiting rare and extreme volatilities. The catalyst behind the turbulence was a true Black Swan event: the novel coronavirus (COVID-19) pandemic that made a major global economic downturn appear inevitable.

Let’s take a look at a few safe-haven trading strategies that savvy traders are using amid the tumult of 2020.

Safe Havens and the COVID-19 Recession

COVID-19 broke onto the global stage in mid-February 2020. At the time, leading U.S. equities indices were pushing record highs, American unemployment was near historic lows, and economic growth was stable. Following 90 days of unprecedented lockdowns, quarantines, and travel bans, the promise of 2020 quickly devolved into panic.

Amid the pandemic’s early stages, most financial authorities agreed that a major worldwide economic downturn was inevitable. In April, Goldman Sachs projected a U.S. recession four times worse than the financial crisis of 2008. Later on in June, the International Monetary Fund (IMF) estimated global GDP for 2020 to shrink by 4.9 percent.

Given these ominous predictions, risk-averse trading strategies became popular among market participants. Here are two traditional game plans that proved effective during the downturn of 2020.

When In Doubt, Buy Gold

Stocking up on physical gold during trying economic times is nothing new. Typically, when skepticism rules the markets, the yellow metal performs well. However, when going long gold futures, investment horizon and applied leverage must be addressed. If not, a great market call can be negated by a sudden downturn in pricing.

During the March 2020 market panic, gold futures experienced severe bearish volatility before closing the month largely unchanged. Although the long-term market consensus toward gold was bullish, a mid-March crash beneath yearly lows wiped out many traders who were long bullion futures. Following the crash, a 90-day rally ensued, taking prices to heights not seen since the crisis of 2008.

So what types of trading strategies did astute traders implement? Here are a few:

  • Focus on the deferred month: In futures, traders have the option to engage the front-month or deferred-month contract. If a trader buys a deferred-month issue, the long position has more time to mature ahead of contract expiration. During March 2020, wise gold traders focused attention on the August and December contracts, not simply the most active.
  • Buy the dip: “Buying the dip” is a tried-and-true strategy that equities market participants use. In the case of gold, March 2020 brought opportunities to buy in from the established yearly low or the psychological barrier of $1,500. April and May gave traders many chances to go long from Fibonacci retracement levels or short-term moving averages. Taking a long position in standard-sized gold futures (GC) required a significant capital outlay, but micro gold (MGC) futures offered traders vastly reduced exposure and margin requirements.

To capitalize on economic strife via gold futures, timing market entry is critical. During the coronavirus-fueled markets of 2020, this was certainly the case. For traders who focused on deferred month contracts or bought the dip, March to July 2020 brought returns upwards of 25 percent.

Trading Safe Haven Currencies

It’s no secret that trading currencies during an economic downturn is tricky. Central banks and governments frequently intervene in the markets, driving periods of heavy volatility. Nonetheless, a number of currency trading strategies can prosper during periods of recession.

Amid COVID-19 going supernova in the spring of 2020, the U.S. dollar (USD) became the world’s premier safe haven asset. As a result, the USD Index rallied to levels not seen since the early 2000s.

Unfortunately for USD bulls, the euphoria was short-lived. Aggressive government stimulus and U.S. Federal Reserve quantitative easing (QE) undermined long-term USD strength. Accordingly, many market participants traded their USDs for traditional safe haven currencies, with the Swiss franc (CHF) and Japanese yen (JPY) being the most prominent choices.

By acquiring francs and yen, traders gained insulation from perceived dollar devaluation―a phenomenon commonplace during recessionary cycles. In the 90 days following March’s COVID-19 panic, going long on the CHF or JPY returned around 4.0 percent. While not a major windfall on the cash markets, the application of futures leverage made yields on Swiss franc FX and Japanese yen FX longs extremely attractive.

Interested in Learning More Risk-Averse Trading Strategies?

Economic downturns can be challenging. High unemployment rates and stagnant growth are demoralizing for many people. However, for active traders, trying times bring opportunity.

To learn more about how futures can help you profit during the next economic downturn, contact a member of our team. For more than two decades, they have witnessed it all―booms, busts, pandemics, and elections.

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