The consensus is, and forever will be, divided on the effectiveness of QE2. The simple fact is that it will come to an end on June 30, and this could have some significant effects on commodities, the economy, and your portfolio. The Fed rarely moves from easing straight to tightening, so the overall size of the balance sheet will probably not change much through most of this year. The bank will most likely reinvest assets as securities mature or, at most, allow the balance sheet to decrease slightly by reverse repurchase agreements. Whether the lack of stimulus causes the U.S. to double-dip or effects the economy in a more muted way, liquidity will be coming out of the markets. This should have the most pronounced effects on commodities and those economies which have profited most from easy money policies.
Gold has some seasonality price pressures coming in July/August, which makes it an ideal short against decreased liquidity. SPDR Gold Trust (NYSEARCA:GLD
) and ProShares Ultra Gold (NYSEARCA:UGL
) are two options popular with investors. Oil may also feel some pressure from decreasing liquidity, but could also slide if the economy falters or we see some stability in Libya. Futures and options in crude are available from the CME Group (NYSE:WTI
). One way to play it may be to sell short-dated futures or options and buy those further out. This position will profit from a stronger economy in the second half, but hedge against temporary weakness in energy.
Investors must perform their own due diligence and understand how a position or event will effect their existing portfolio. For example, any default event in Europe will most certainly drive investors to safe assets and drive up the price of gold. You could be patting yourself on the back over your short-Europe trade while cutting losses on your short-gold trade.
Stay tuned. I’ll cover a few more possible game changers in a future article. Until then, feel free to suggest events you would like to hedge against.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.