European Banks Under Pressure As Investors Celebrate QE2, Gold And Silver At Crucial Juncture

By: Jeb Handwerger | Fri, Nov 5, 2010
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Ben Bernanke has officially announced quantitative easing and the markets are reacting with rising prices amongst all asset classes. "QE2" is practically an economic tool to artificially raise asset prices to prevent deflationary forces. When prices in asset prices decline due to a lack of demand you have deflation. Quantitative easing essentially is a preventive approach for central banks to prevent deflationary forces. This techniques is used when a Central Bank can no longer lower interest rates due to it being to close to zero, so they just print money devaluing the currency and raising asset prices across the board.

Once started with QE it is very difficult for an economy to get off of it. As with many drugs, the high is great. but the hangover comes the next morning and the repercussions are unknown. This is unchartered territory where you have a major devaluation of the world's reserve currency. For every action of the central banks there are reactions.

Now we are seeing a reaction with sovereign debt issues resurfacing in Europe as tensions grow over debt restructuring, bank bailouts and budget issues. Borrowing costs are rising because unlike the Fed, the European Central Bank did not purchase debt. The ECB will need to address these concerns of a declining dollar and rising borrowing costs leading to a potential liquidity trap.

This may lead to a replay of the May "Flash" crash where there were reports of banks refusing to lend to each other. It is beginning of a global trade war where countries engage in competitive protectionism through currency debasing. Interventions and market manipulations lead to market crashes.

A weak U.S. dollar is an additional tax on the American consumer as many are still faced with poor job opportunities and falling home values. A devalued U.S. currency puts pressure on emerging markets which need a strong dollar to make their products competitive.

GLD Trust Shares

Today gold and silver made a break out from the three week consolidation from early October. In early October, I mentioned precious metals would have a pullback. Over three weeks gold pulled back and this latest quantitative easing has pushed the price up to the upper resistance level again. This is not a point where I buy or add to positions as during the past two years gold has made 20-30% runs and given about half of those gains. In this market where interventions and manipulations are occurring chasing markets could be treacherous. Profit taking when the news and the consensus is bullish is the disciplined trader's approach. When everyone else is comfortable I get cautious.

 


 

Jeb Handwerger

Author: Jeb Handwerger

Jeb Handwerger
http://goldstocktrades.com

Jeb Handwerger

I started reading charts at eleven years old. One day my father, a market trader and technician found his library of books on technical analysis mysteriously disappearing. He later found the textbooks under my bed. For many years day and night I studied technical analysis and charting, working and learning from my father who has over 50 years of trading experience. Technical analysis is my passion and love.

In 2001, I started noticing the junior mining stocks and gold as having a tremendous upside. For the past 9 years I have researched many juniors and have identified the major winners using technical analysis and finding top management.

I earned a Bachelors Degree in Mathematics and a Masters Degree. I learned most of my technical analysis from the school of hard knocks, managing real money for myself and for my family.

Constantly perfecting my craft, I have traded for two decades of success in many different markets. I have been asked to post ideas to some of my students who have taken my course in charting and technical analysis. I have made an excellent living trading stocks for myself.

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