How to Play the QE3 Rally

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"While the market probably has factored in some of QE3, the move will nonetheless add more liquidity to the market, devaluing the U.S. dollar, meaning an increase in gold and silver prices."

QE3
QE3 was finally announced by the U.S. Federal Reserve after today's Federal Open Market Committee (FOMC) meeting.

Federal Reserve Chairman Ben Bernanke announced that the Fed will launch a new bond-buying program to purchase $40 billion in mortgage-backed securities each month. Interest rates will be kept at 0% through mid-2015, six months longer than originally planned.

Together with the rest of the remainder of the Operation Twist program, the Fed will be buying $85 billion in bonds for the rest of 2012. The new bond purchases will start tomorrow (Friday).

Bernanke and the FOMC decided in an 11-1 vote to use unconventional monetary policies once again to bring down unemployment that has been stuck above 8% for 43 months and to boost an economy that grew at a lethargic 1.7% rate in the second quarter.

But this new program, compared to previous rounds of easing, has a new twist.

QE3 is an open-ended program to buy bonds until the economy improves. The Fed said in its statement earlier today that if the labor market does not improve it will continue purchases and undertake additional measures if needed.

Now that QE3 is here, will this new measure actually boost the economy and spur job growth?

Catherine Mann, a Brandeis professor and former Federal Reserve economist doesn't think so.

"The Fed continues to want the economy to grow faster and specifically, to grow more jobs, but the ability of QE to do that is extraordinarily limited," she told CNN. "We know that QE reduced interest rates, but we also know that has not led to more construction, more mortgages, more business investment, or more lending. Since it hasn't done any of that, it probably hasn't created jobs either."

How Investors Can Play the QE3 Rally
Now that QE3 has been announced the question is will the markets continue this recent run or is this news already priced in?

The markets have enjoyed what many deem a QE3-induced rally over the past few weeks with the Standard & Poor's 500 Index reaching a four-year high and the Dow Jones Industrial Average reaching levels not seen since 2007.

Since Aug. 1 when the FOMC last met and said it would act if the economy worsens, which it has as shown by manufacturing and jobs reports, the S&P 500 has gained 4.3% while the S&P GSCI Spot Index that tracks the price of 24 commodities has risen 7.2%.

This run isn't over.

Investors can still play QE3 with the GSCI Index, as well as with ETFs that track the index.

While the market probably has factored in some of QE3, the move will nonetheless add more liquidity to the market, devaluing the U.S. dollar, meaning an increase in gold and silver prices.

Money Morning Global Resource Strategist Peter Krauth has been waiting for QE3 and the subsequent rise in real assets.

"I expect lots more money printing, whose inflationary effect is always kind to silver and gold," said Krauth.

The speculation alone has already caused a rally in metals prices and global stimulus measures will send them higher. Gold prices are up 7% in the past month, reaching a seven-month high yesterday (Wednesday) at $1,749 an ounce. Silver prices have been on a stronger move, up almost 20% in the last month to $33.40 an ounce and might have more upside potential than gold.

If you haven't already added real assets such as gold and silver to your portfolios, you're not too late.

If QE3 does what it is intended to do and boosts the overall economy and consumers start spending more look into the Consumer Discretionary SPDR ETF (NYSEArca: XLY) which is up 20% year-to-date and should continue to generate solid returns with QE3.

A more cautious play on the overall market surging after QE3 is the SPDR S&P 500 ETF (NYSEArca: SPY) which tracks the S&P 500.


Ben Gersten
Money Morning

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