For the second day in London, copper fell based on speculation that the Federal Reserve may begin a pull-back on stimulus. This would curb the demand for metals. Federal Reserve Chairman Ben S. Bernanke will speak to reporters following a meeting on Wednesday regarding policy. A decision regarding the interest rate is expected, which recently led traders to sell Treasuries.
Since mid-March, articles have been circulating advising investors to prepare for an end to federal stimulus. On June 30, QE2, the Federal Reserve quantitative easing program, will end. Through massive purchase of bonds, this program was designed to stimulate the national economy and reduce interest rates over the medium-term. Each month, the Fed has purchased over $100 billion in Treasuries. When this program ends, the Fed will have a balance sheet containing $1.6 trillion in government debt.
Experts calculated that the Fed has been purchasing 70 percent of new Treasury debt. They wonder who will continue the practice when QE2 ends. The government is far from being out of the woods financially. A logical solution is that overseas buyers will need to find Treasuries more attractive via a higher interest rate for U.S. debt.
Smart investors are not waiting until July to determine the effect of QE2. They are making proactive moves now to protect themselves. Save havens may not clearly present themselves, making alternatives like emerging market bonds attractive. Falling prices for commodities like copper also represent opportunities.
The industrial metals sector will continue to experience supply shortages through at least the end of this year, many predicting longer. Investors seeking a safe place to keep their money during the unpredictable period following June 30 should take advantage of low copper prices and invest in this metal now. Though a drop in demand may initially follow QE2 ending, industrial need for the metal should have it rebounding quickly.
