Contrarian Setup for Delayed QE3
The critical question facing the market and the nation is -- what will happen when the Fed halts its monetizing machinations at the end of June? Some believe that the Fed will (out of fear) immediately move into QE3. My own guess is that after June 30, the Fed will wait a bit, just to see how the markets are reacting to the end of quantitative easing.
Quantitative easing means that more dollars are being created via monetizing the debt. The more dollar being created, the weaker the dollar. So what will happen when the Fed ceases (at least temporarily) to create additional dollars? One contrary theory is that the dollar could (surprisingly) strengthen.
Currently, the "smart" and sophisticated thing to do is to be short the dollar or be in a currency other than the dollar (including the precious metals). The prevailing wisdom is that you should be short the US dollar. It's the obvious conventional wisdom "smart" play.
And I wonder, is the market set up to cross up the dollar bears? If the Fed halts its dollar printing activities, we might see a sudden dollar rally. A rally that would catch the dollar shorts by surprise.
In that case, if the dollar were to rally, we'd probably see pressure on the precious metals. What then? My thinking is that gold and silver might correct temporarily. This would be the correction that would "knock out" all the Johnny-come-latelies and the belated in-and-out traders. It would also be a gut-check for all the so-called gold-bugs. Once the correction was over, I believe gold and silver would be ready for their final blow-off.
Notes -- The precious metals mining stocks are not acting well. I'm thinking that they are backing off and preparing to get hit by a tired general stock market that may be ready to correct.
Gold and silver have enjoyed a long upward ride. I'm thinking that the People's Bank of China may have put a "synthetic put" under gold. The PBOC holds over $3 trillion (gasp) in reserves, of which about $1.5 trillion is in US securities. China has made it known that it wants to diversify away from US items, and that it wants to increase its meager holdings of gold. I'm thinking that during every dip or weak patch in gold, the PBOC is there, waiting to scoop up whatever quantities of gold are offered.
Russell Comment -- Face it, over the short or intermediate term, nobody knows what will happen to gold and silver. Sure the metals may be overbought (see red arrow below). So what! Every genius knows that.
I address the problem as follows. The precious metals are in primary bull markets that have not been concluded. Don't try to out-smart the primary trend -- just stay with it.
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