Driving Down the Borrowing Cost to Buy Gold
QE2 makes borrowing money cheaper for those creditworthy institutions, but it may ultimately springboard inflation down the road if unchecked. We have also noted how gold and precious metal ETF/ETN products have reached a critical mass in size and most are now even larger. The SPDR Gold Trust (NYSE: GLD) is king of gold ETFs with millions of shares traded each day and with assets well above $50 billion. If inflation is going to be a FOMC-manufactured event and if the s
hiny yellow can keep rising, then the PowerShares DB Gold Double Long ETN (NYSE: DGP) is your answer. This is an exchange-traded note rather than a true asset trust with physical gold. The “DGP” gives double the performance of gold, but there may be some tracking issue and the ETN status brings on more issues than merely an ETF. Taxation on precious metals holdings may also be different than just capital gains for many investors.
How Low Can Bond Yields Go?
If you think that the FOMC will drive long-term rates to under recent lows, there is the iShares Barclays 20+ Year Treasury Bond (NYSE: TLT) ETF. It pays dividends (Treasury yield coupon payments) based on the current yield of the underlying Treasury index, yet there is no leverage.
There is a leveraged angle for ETF and ETN investors and traders. The ProShares Ultra 20+ Year Treasury seeks daily investment results of double the daily performance of the Barclays Capital 20+ Year U.S. Treasury Index. Want to bet against QE2 and if you see rates rising? The ProShares UltraShort 20+ Year Treasury (NYSE: TBT) which is double-short the Barclays Capital 20+ Year U.S. Treasury Bond index. These are just a sample of the many ETFs/ETNs covering short-term and long-term bonds.
General Stocks Via ETFs, The Go-To Names
If you have high hopes that QE2 will just help every sector out there, there is nothing more liquid than the SPDR S&P 500 (NYSE: SPY). This has no leverage to it, but it trades almost 200 million shares a day and generally tracks within a few basis points of the S&P 500. The SPDR Dow Jones Industrial Average (NYSE: DIA) is meant to track the Dow Jones Industrial Average within a few basis points. This one also has no leverage and it trades “only” about 7 million shares a day.
If you just want NASDAQ or tech-oriented ETFs, there is the PowerShares QQQ (NASDAQ: QQQQ). This tracks the NASDAQ 100 and trades over 70 million shares on an average day. Just keep in mind that the QQQQ has almost 30% of its weighting tied up in Apple (almost 20% alone), Microsoft and Google.
We have noted the basic ETFs here for or against QE2 but there are dozens of other secondary or tertiary ETF and ETN products out there. We usually default to the most liquid and most active with the highest market cap.
The FOMC cannot lower rates on the short-end, and a recent TIPS Treasury auction actually generated a negative yield. The FOMC is likely to promise low short-term rates for the future and QE2 can be effected by buying up debt on the long-end of the yield curve simultaneously. The new verdict seems to be a few hundred billion spread out through time rather than all at once. Some would like to see more, others would prefer no QE2.
The consensus is no longer for a double-dip recession, but growth estimates for what lies ahead remain muted or have come down of late. It seems that the current inflation is too low for the Fed targets but the recent trends in commodities may be taking care of much of the lack of inflation. Extremely slow growth is not enough despite a recovery, and the hope is that more jobs will ultimately be created.
The FOMC wants inflation higher despite the recent up-tick in inflation as commodities have risen and as the double dip recession argument has petered out for now. The paradox is that the FOMC also wants rates to stay very low for an extended period of time. It seems that our government is about to turn on the printing presses so it can buy debt… a move to devalue the dollar and to artificially keep the rates lower by buying the debt up. Maybe the United States balance sheet will need to adopt pro forma accounting and non-GAAP earnings.
The rule is and has always been, “Don’t Fight the Fed.” That might be true for many, but there are many careers which have been made and broken against fighting the Fed. Whatever QE2 happens to be, we’ll find out what at least the first phase of it will be around 2:15 PM EST today.
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JON C. OGG
