Will QE3 Equal Higher Commodity Prices?

The Fed's printing press is running, and there will be consequences.

Rob Russell
Rob Russell

It was no surprise last week when Federal Reserve Chairman Ben Bernanke announced yet another round of quantitative easing (QE3) to continually manipulate interest rates to an artificial low and to “help” stimulate the economy. As expected, this brave (but expensive and shortsighted approach) was applauded by the markets with a big rally. Now, everyone loves a good rising markets, but I can’t help but think of the saying, ”Fool me once shame on you, fool me twice shame on me.” What happens if you’re fooled three times? Have either of the first two rounds of quantitative easing actually worked to truly stimulate the economy? Or have they pushed us deeper into a pit of inescapable debt in order to falsely prop up the markets like a house of cards?

How will Ben Bernanke's QE3 play out?

Time will only tell how dramatically negative the long-term effects of QE (in essence, the printing of money) will have on our economy and financial viability, but being smart investors we have to play the cards we’re dealt. In other words, don’t fight the tape. With that being said it’s apparent with a near-zero-interest-rate policy, equities will perform well in the very short term simply because there are no reasonable returns in the principal-protected space (i.e. CDs and government bonds), which naturally forces conservative savers into riskier markets. Again, this is an obvious outcome as the smart money has already taken advantage of this trend, but what about the other less publicized, far-reaching effects of QE3?

No Love for the Dollar

The further printing of money here in the U.S. will undoubtedly dampen the value of the U.S. dollar (absent some catastrophe in Europe or the Mideast) and other relative currencies leading to one conclusion—commodities will rise. If my conclusion proves to be accurate in the short- to mid-term then one would be wise to reconsider their allocation to these assets. There are many approaches to playing the ongoing rise in commodities and here are some valuable tips:

  1. Diversify among as many different types of commodities as possible. Everyone seems to like gold and silver, but what about showing some love to coffee, sugar, corn, soybeans, oil, natural gas, etc. There are over 100 markets to play in North America, so select the markets with the least amount of correlation and stick to a disciplined strategy by following the price trend either long or short.
  2. Vary your investment options. Approaches to investing in commodity-based accounts are plentiful. It can be as simple as buying a stock of a company that creates fertilizer, to buying an ETF that attempts to mimic the price of soft commodities, to depositing money into an annuity that offers an index linked to many different commodity prices, or even investing into a managed futures fund.
  3. Export-based companies will generally perform better with a weaker dollar since foreigners will be able to buy more U.S. goods. Stocks in companies that primarily export may perform better than their import centric rivals, so it may be smart to review your stock positions and see who will thrive in a pro-export environment.
  4. Whether we end up with QE4 or eventually QE40 one thing is certain, smart investors need to be actively involved and remain in the present as the Fed is stubbornly committed to manipulating a market that is supposed to be free.

    Robert Russell is the author of Retirement Held Hostage, CEO & CIO of the Ohio-based Russell & Company, a private wealth management firm specializing in helping affluent individuals ages 45 and up create and preserve their wealth. He co-hosts a radio show, authors The Rob Report blog, and is a frequent contributor to The Wall Street Journal, SmartMoney, & FOX Business.