by Jason Jenkins
Fed Chair Ben Bernanke tipped his hand to the Fed’s monetary policy through mid-2013 at the Federal Reserve Board’s meeting last week. They’re going to keep interest rates low for the next couple of years. While the Fed can boost asset prices and support the economy, it can only do this at the expense of devaluing our currency. The Fed disclosed a range of policy tools to promote a stronger economic recovery. Investors should note that money will be cheap in an attempt to keep asset prices afloat and the Fed Funds Rate will be “exceptionally low,” at least through this period.
Bernanke now has a toolbox of policies and on the outside of that box there should be a big sticker that reads “QE3,” because if it walks like a duck and quacks like a duck, it means that the U.S. economy could be in real trouble.
Why QE3 Won’t Motivate Lending or Consumption
It’s not facing setbacks due to acts of God or an ornery Mother Nature - the market went through historic volatility over the last two weeks because it’s growing at a minuscule pace. With interest rates basically at zero right now and many corporations and banks virtually cash cows, more quantitative easing wouldn’t motivate lending or consumption.
As I’ve stated in past articles, we’re not facing a liquidity problem. We’re facing an issue of confidence in our economy and politics. Lending and demand creates jobs and economic growth and the Fed has to be very careful here. Some sort of QE-like policy could not only cause high inflation, but could also be the catalyst for a stock bubble burst by inflating stock prices beyond the economy’s real strength.
However, this is what we’re stuck with, so how do you play it?
Hold Gold as The Dollar Continues to Devalue
If the dollar continues to be devalued, you need to hold on to your gold.
I know it sounds like a broken record, but gold will reach $2,500 – according to J.P Morgan – and more because it’s one of the last safe harbors against a weak currency. You don’t buy gold because the market is volatile, but you invest in it because it trades opposite weak currencies. The stock market bounced back, but the dollar and euro look to be weak for a long period of time.
As Investment U’s Matthew Carr wrote last month, gold ETFs like SPDR Gold Trust (NYSE: GLD), PowerShares DB Precious Metals (NYSE: DBP), and iShares Gold Trust (NYSE: IAU) are all up nearly 30 percent this year. He also gave a list of gold mining stocks that could be very profitable value plays.
Missed the Boat on Gold? Try These Precious Metals…
If you think you’ve missed the boat on gold and are looking for other precious metals as a safe haven, look at palladium, silver and platinum. Over the month of July, both palladium and silver have outperformed gold – 12.7 and 14.7 percent to 9.1 percent, respectively. In that same time, platinum was up 5.3 percent.
ETFs may be the best way to play these types of metals.
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