If history has been any indicator, when Ben Bernanke speaks, markets go wild. As if last week’s heavy trades weren’t enough to confirm that theory, there is even more evidence correlating to Bernanke’s speeches and movements in the U.S. dollar. Specifically, Bernanke’s mentions and hints of quantitative easing tend to have a dramatic impact on the dollar, as the previous two programs have established a trend that may send commodities soaring in the short term [see also Four Commodities To Buy Before Roubini’s “Perfect Storm”].
QE1 and QE2 were announced at the end of 2008 and 2010 respectively. The chart below shows the returns for DB USD Index Bullish Fund (UUP) over the last five years. The ETF tracks the U.S. greenback and is one of the most popular currency ETFs on the market. The first round of QE was announced on November 25th 2008, about the time that the dollar takes a massive nose dive. Though it recovered in the following weeks, it would be short lived, as the currency was slaughtered just weeks later. Similarly, QE2 was announced November 3rd 2010, about the time that the dollar took another major slide from which it is still recovering.
If history is any indicator, it seems that a prime time for QE3 to be announced will be sometime in November of this year, déjà vu anyone? Though Bernanke has been hinting at a possible QE program for quite some time, the only material outcome has been two rounds of the relatively useless “Operation Twist”. As Bernanke and the Fed continue to hint at QE3 and the economy continues to struggle, it seems like a matter of when, and not if, for another hefty round of money printing. Luckily for commodity traders, this represents a great opportunity to cash in on a market trend [for more commodity news subscribe to our free newsletter].
How to Profit
A weak dollar is typically a good thing for commodities prices, as it relieves some pressure and allows them to climb. Though you can cherry pick a number of assets that could potentially perform well with a weak greenback, one of the best examples has been gold and the SPDR Gold Trust (GLD). A five year chart for GLD shows a stunning pattern, quite the opposite of the dollar. GLD takes a massive spike in the end of 2008, and after a quick dip at the end of 2010, this ETF made a run almost straight up until it hit its historical high in mid 2011. Coincidentally, silver and the iShares Silver Trust (SLV) exhibited similar movements, granting another potential investment option [see also Three Reasons Why Gold Is Overvalued].
Lastly, you can always choose to short the dollar, as it will invariably get rocked by an announcement of QE3. The only question left is if you believe the Fed will install more asset purchasing or if it will discover that a third QE program will do nothing more than make it harder for us to pay back our enormous debt piles. Only time will tell how Bernanke will act, but be sure to have your finger on the trigger if and when “rescue” arrives.
Disclosure: No positions at time of writing.