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What Will Happen As QE2 Ends?

Tue, May 24, 0:51 AM ET, by Jeb Handwerger

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The euro (FXE) slid compared to the US dollar (UUP) after meeting and reversing at its long-term downtrend resistance line two weeks ago. About four weeks prior to that, I alerted readers that the euro could reverse lower supporting precious metal prices. In a March 28 article I wrote, "Watch for a move out of the euro to support precious metals prices as the euro reaches its descending upper resistance level. For the past two years the euro and the dollar have done this inverted dance wherein one goes up and the other goes down. But one thing I am not fooled about is the fact that they are both in secular long-term downtrends."

The euro continued to press higher on the hopes of a recovery from July of 2010 until May of 2011. The decline in the euro is due to expectations of further bailouts in Europe and the European Central Bank taking a very dovish position by not raising interest rates. Greece is on the brink of default and Portugal may receive additional assistance. We are witnessing pressure put on the euro and capital flowing into the US dollar which has forced some UD dollar (UDN) bears to cover their aggressive short positions. This short covering rally in the US dollar has caused a commodity (DBC) de-leveraging forcing hedge funds to raise cash reducing their exposure to commodity-related equities.

Don't forget that the US is dealing with its own domestic economic issues combined with a renewed commitment to democratize the Middle East, which will require additional borrowing. Investors and traders are asking: Where will this money come from? The US has already hit its debt limit and has been warned of a credit downgrade.

Many are concerned by the reported end of quantitative easing II (QE2). However, noises are being made about the possibility of the imposition of QE3, which could possibly be tonic for gold and silver prices.

At present gold may be basically pricing in the possibility of sovereign default risk. Witness the pleas of Greece for immediate aid. Other members of PIIGS nations may not be far behind. The biggest threat to our thinking is a continuing dip in risk appetite initiated by the end of QE2 or as stated a heightening in the eurozone debt crisis. This may be causing this US dollar spike as capital flows to safe havens and investors close their short-dollar wagers.

AT my firm, we feel that such a move would possibly be transitory in nature. Should QE3 not be instituted, Ben Bernanke has a whole bunch of other arrows in his quiver. Monetary printing by any other name may be just as effective as it is surreptitiously instituted. There is a strong possibility that the Fed will remain faithfully wedded to aggressive monetary policy in order to lower unemployment and extricate the nation from its economic mess. A black swan may be steaming toward us. As remote as it may seem, the possibility of a US financial default may be in the cards. But then, isn't that what black swans are always about?


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This Article's Word Cloud:   Bank   East   Europe   Greece   Members   This   about   additional   aggressive   black   capital   commodity   could   debt   default   dollar   economic   euro   from   goes   gold   instituted   limit   long   lower   move   other   possibility   possibly   precious   prices   remain   resistance   reverse   risk   short   sovereign   term   that   their   thinking   this   very   weeks   wherein   which   will   with   would   years

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