End of QE2 Is Bearish for Gold: Dollar Will Likely Appreciate Short-Term

Includes: GLD, UDN, UUP
by: seekinGold

Yesterday the Federal Reserve ended its $600B asset purchase program widely known as Quantitative Easing II. The Fed is now the largest holder of Treasurys. The idea was to inject the market with money that we don’t have in the hopes that the economy would pick up. Can an economy be saved by spending? It sounds counter-intuitive and who guarantees that the money would go towards new businesses and employment? As a matter of fact, unemployment is above 9%, which means that the program - at minimum - failed to address this important aspect of the economy.

Growth has slowed and inflation has risen, which makes the money in your pocket less valuable (is that why people buy gold? To preserve wealth?), but on the bright side, the stock market has recovered - something that was not quite in the Fed agenda but Bernanke is highly proud of.

Will there be QE3? If the economy suddenly recovers, the answer is no - but if we keep sliding in the same direction, and see some more bad economic data, then voila... Most analysts like Marc Faber expect QE3 by the end of this year.

As discussed previously, the end of QE2 is bearish for gold as the U.S. dollar will likely appreciate in the short term, therefore placing dollar denominated gold under pressure. Now that Greece is off the media’s front-page, the main driver for gold must come from investment demand. For long term investors it does not make that much of a difference if gold dips to $1400; they know it will go back up. A trade recommendation is to buy below $1,500 an ounce. That’s where gold is trading now. Are you buying? Waiting? Or selling?

Disclosure: I am long select gold stocks