Stock Up On Euros Before The Pound Becomes Toilet Paper

As the holiday season approaches many will be thinking about buying Euros, and with the British Pound close to €1.20 the question is, is now a good time to stock up on Euros?

In response to the global economic downturn Britain embarked on a programme of massive money printing which was designed to devalue the pound – something it did very effectively. On 15 Jan 2007 the Pound brought €1.52 but by 22 December 2008 it brought just €1.04 – a fall of 31%.

A 5 year chart of the GBP vs. the EUR

Chart courtesy of Yahoo Finance

Following this huge devaluation the GBP/EUR fell into a range between €1.09 and €1.23 and for the past six months the Pound has slowly been moving back to the top of this range and is now at €1.1997.

A 2 year chart of the GBP vs. the EUR

Chart courtesy of Yahoo Finance

If the Pound can break through and hold above €1.20 it has a real chance of making another run at the €1.23 area. However given Britain’s precarious debt situation any rally beyond €1.23 might be short lived.

In today’s environment of rising sovereign default risk, the strength of a nation’s currency is a function of its ability to weather the storm, and Britain is only on the list of “safe haven” countries because the true size of our debts is largely unrecognised by the markets.

Not only is Britain the most indebted nation on the planet, but our colossal debt burden is manageable if, and only if, the markets remain convinced that we are committed to reducing the deficit (allowing us to keep our AAA credit rating) and the economy continues to grow (albeit barely). This is something that I cover in detail in the current issue of the Mountain Investor Report and it’s something that I simply don’t believe is possible given the current configuration of the British economy.

It is therefore only a matter of time before we lose our AAA rating and bond yields spike, undermining our ability to finance our still growing budget deficit. When that happens I expect the Pound to fall hard and not just against the Euro. Personally I will begin buying Euros as soon as we retest €1.20.

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