Central bankers Mario Draghi and Ben Bernanke appear to be opening the money spigots full throttle and this creates both dangers and opportunities for ETF investors. Last week Mario Draghi electrified global markets with his bond buying announcement and this week the world waits for the Federal Reserve meeting and Dr. Bernanke's press conference on Thursday.
All summer long, market players have been handicapping a move by Dr. Bernanke to offset sagging employment. First was the speech at the Federal Reserve Bank of Kansas City Economic Symposium in Jackson Hole, Wyoming, in late August where he hinted at more easing ahead and defended Fed policies to date.
Then on September 7, the quantitative easing buzz went into overdrive when the Bureau of Labor Statistics released its disappointing non-farm payrolls report showing that a paltry 96,000 new jobs had been created, well below July's 141,000 and widely missing estimates. On the heels of Dr. Bernanke's Jackson Hole statements regarding unemployment being unacceptably high, markets responded with higher prices as QE3 seemed to be heading towards being a done deal.
For investors, a new round of quantitative easing would most likely be a game changer as the old saying "don't fight the Fed" turns into a global tidal wave of easy money. Like always there will be winners and losers and, if history is any guide, some of the greatest beneficiaries of QE3, should it occur, would likely be in the precious metals complex.
When Dr. Bernanke hinted at QE2 in August, 2010, iShares Sliver Trust (NYSEARCA:SLV) was at approximately $19/share and set off on a run that peaked at around $47/share in April, 2011, a gain of roughly 145%.
The lessons of history, coupled with Dr. Bernanke and the possibility of QE3, make iShares Silver Trust Wall Street Sector Selector's ETF Tip of the Week.
iShares Silver Trust, up some 20% since mid August, has a point and figure price objective of $45, approximately 38% above current levels. A return to old highs would yield roughly a 50% gain from today's levels.
Chart courtesy of StockCharts.com
Other ETFs offering exposure to the silver market include Silver Trust (SIVR), which tracks the price of silver bullion and holds physical silver that, according to the company website, is "held in vaults by the Custodian (HSBC Bank USA N.A.). All physical silver held with HSBC conforms to the London Bullion Market Association's (LBMA) rules for Good Delivery."
More aggressive silver bulls could consider ProShares Ultra Silver (AGQ), which is designed to move at 2X (200%) the daily moves in silver bullion (leveraged ETFs can develop large tracking errors and are suitable only for investors who understand how these securities operate).
On a technical basis, silver and silver ETFs are very overbought with RSI readings in the 80s and so a correction could occur in the short to medium future. However, with the central bankers putting the pedal to the metal, silver could stay overbought for a long time to come.
Precious metals markets are always fraught with high volatility and the potential for sudden reversals, and so one either needs to be a nimble trader or have a strong stomach to hold on for the longer term in the belief that silver is going higher.
If Mario Draghi or Dr. Bernanke fail to deliver the goods, precious metals would likely get hammered. However, all indications are that the two powerful bankers are going to continue goosing the global economy for as far as the eye can see, and if that turns out to be the case, silver's future could be bright, indeed.