Nicholas Santiago
In The Money
October 14, 2010

Everyone knows and expects quantitative easing part two to begin or occur very soon. The stock market has already factored most of the Federal Reserve Bank’s action into the current stock price. Please understand that the stock market tries to stay ahead of the economy often by 3-6 months. Therefore, while it certainly looks as if QE2 has been taking place already if it does not get enacted soon this market could tumble. As we all know by now quantitative easing just means that more money will be printed and when this happens the U.S. Dollar Index will decline and lose value. Since June 7th, 2010 the U.S. Dollar Index has declined by nearly 12.0 percent. This alone will make goods such as oil, gasoline,and food more expensive for an already strapped U.S. consumer. Please remember that consumer spending accounts for 70.0 percent of the GDP in the United States.

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It is well known that Ben Bernanke loves to squeeze out short sellers. I remember in 2008 when Chairman Bernanke lowered the discount rate just before the opening bell on an options expiration Friday. This caused a very sharp short covering rally. While the rally did not last very long it showed many traders that the Federal Reserve Bank Chairman Bernanke knew what he was doing. However, this time around the stock market has rallied since late August and most of the short sellers are no longer in the stock market. Short selling is a very important part of trading. When a short seller covers his position he is obligated to buy back the stock that he borrowed and sold short. This causes the major bounces higher at the lows in a market. When the short sellers are not in the market the lows will not get supported. For example, short selling was banned on the financial stocks in late 2008. These stocks did not rally for more than a few days before they collapsed and traded much lower than they normally would have. Most other economies that have banned short selling have seen major collapses in their markets. When you play with the weather the storm will usually be much worst than it’s natural trend.

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Where have all the short sellers gone? Traders are not stupid people. In fact, in my humble opinion traders are the smartest people around. Many traders that would normally short the stock market at important resistance levels are actually buying gold and silver. If the Federal Reserve Bank is going to keep printing money in order to keep the stock market propped higher traders will take advantage of the one asset class that will be directly affected. That asset class is the precious metals. Gold has climbed nearly 17.0 percent since July 28th, 2010. As long as the Federal Reserve continues to print U.S. Dollars, gold and silver will continue to trade higher.

Gold has soared on the back of QE2 (Quantitative Easing Pt. 2)

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