“This is what competitive devaluation looks like.”

#-ad_banner-#That’s what Bloomberg anchor Olivia Sterns said Wednesday morning, referring to news that China’s central bank was cutting rates. In an effort to revive slowing economic growth, the People’s Bank of China decided to cut its reserve requirement ratio (RRR) — the amount of deposits banks must hold in reserve rather than lend out — by 0.5% for large commercial banks and 1% for smaller banks.

This is the first time the bank has cut the ratio in almost three years, and its effort is estimated to increase cash in the system by 700 billion yuan, or $112 billion.

China’s economic growth, while still relatively strong around 7%, has been slowing for the past few years, but the central bank had previously been reluctant to increase monetary stimulus. So, why ease up now?

In short, because everyone else is doing it.

When the buying power of one currency falls, it makes imports from other countries much more expensive. Not only do the locals buy more of their domestic products, but so do other foreign markets, leading to a boost in demand for domestic products and employment. It does a pretty good job of stimulating economic growth.

However, when one currency is devalued, other countries will see their own currencies rise in value. When the country lowering its currency is small, the corresponding increase is generally small and spread out among a number of other currencies. However, when the country is large and has significant trade ties with other countries, this change can have a big impact on other currencies. As a result, those countries may decide to devalue their own currency to offset this change, essentially sparking a race to the bottom.

In the month leading up to the European Central Bank’s Jan. 22 decision to employ quantitative easing, the euro plummeted 7% against the U.S. dollar to a decade low. This prompted the Swiss National Bank to abandon its protective cap on the Swiss franc on Jan. 15, rocketing the currency up 21% against the euro.

For the past few decades, competitive devaluation was frowned upon. It certainly wasn’t something large developed markets did. Countries may have preferred a weaker currency to aid export growth, but they weren’t going to “beggar thy neighbor” by direct central bank action.

Clearly, that time is over. Investors will likely remember 2015 as the year the currency wars really began. The prospect has some far-reaching ramifications that the market has not acknowledged yet and could represent the single biggest threat to stock prices. 

Are you ready and do you know how to protect yourself? 

Two Outcomes, One Solution
There are two potential outcomes from a global trend in competitive devaluations, and neither is particularly good for U.S. investors. 

While inflation has been non-existent over the past few years, any rebound in global growth could send consumer prices skyrocketing. From late 2008 through late 2014, the Federal Reserve injected $4.5 trillion into the economy by increasing its balance sheet fivefold. The Bank of Japan increased its balance sheet by 30% in the past 12 months, and now the ECB is planning on boosting stimulus by as much as $1.2 trillion.

Central banks have not done a good job of coordinating policy, and I am not optimistic they’ll be able to coordinate a smooth exit either. 

The second potential outcome is that the value of the U.S. dollar could take off. While it is still uncertain when the Fed will start raising rates, it recently eased off the gas, causing the dollar to surge more than 16% over the past year against a basket of currencies. 

While the stronger dollar has pushed down the price of oil and put a little more money in consumers’ pockets, it could have very real consequences for exporters. Nearly half the revenue at S&P 500 companies is derived from overseas business. As the dollar strengthens, those products become more expensive relative to local products. Foreign products also become cheaper to import and start to undercut U.S. producers.

Over the five years to June 2014, the S&P 500 has increased at a rate five times faster than growth in the general economy. My question to investors is: If U.S. economic growth starts to sputter due to the stronger dollar, what happens to investor confidence and the stock market?

Seek Safety and Income in This Gold Trade
Fortunately, one asset could hold up — or even move higher — in either scenario. SPDR Gold Shares (NYSE: GLD) is still more than 30% below its 2011 high, but since November, shares have bounced 8% on greater market volatility and increased monetary stimulus. 

If global inflation returns in any way, gold prices could start climbing and investor sentiment in the asset could return quickly. If uncertainty returns to the markets, gold could assume its role as a safe haven asset. Either way, the outlook for the yellow metal is good.

To take advantage of this, I’m going to use a put selling strategy. If you’re not familiar with selling puts, please don’t stop reading now. When used properly, this often misunderstood strategy is actually a conservative way to generate high levels of income or buy stocks at a discount to their current price.

If you’d like to learn more about selling puts, I urge you to watch this free, step-by-step training video. In just eight minutes, an options expert with a 100% success rate reveals how she averages 53% annualized gains per closed trade — and how you could collect hundreds of dollars starting this week. Click here to watch.

With shares of GLD trading for $118.64 at the time of this writing, we can sell the GLD Mar 125 Puts for a limit price of $7.25 a share ($725 per contract).

If GLD does not close above the $125 strike price, which is 5.4% above current prices, at expiration on March 20, we will be assigned shares. Since we received $7.25 in options premium, our actual cost is $117.75 per share, a 0.75% discount to current prices.
We want to make sure we have enough money in our account to cover the potential purchase. This means setting aside $11,775 for every put contract we sell, plus the $725 we collected from selling the puts.

But if GLD closes above $125 on expiration, we keep the premium for a gain of 6.2% in just 40 days. If we were able to make a similar trade every 40 days, we would generate a 56% annual rate of return. 

The strike price is only 5.4% above current prices, but there is still a chance that we get assigned. In that case, you can sell call options against the shares for a similar strategy or just sell the shares and repeat with another put selling strategy.

With support from market volatility and global monetary easing, gold prices should trade higher this year, flat at worst. Even if prices do not head higher, you can take advantage of options prices every month to collect income on the shares. 

And if you want to learn more about the benefits of put selling, don’t forget to check out this free webinar that reveals how one options experts has used it to close 85 straight winning trades. Click here to watch it now.

This article originally appeared on ProfitableTrading.com: Alternative Gold Trade Could Protect You From the New Currency Wars​