Fed Ushers in Gold Era

The Fed has ushered in the new gold era with it’s 0% interest rate and the acceleration of “quantitative easing”.  The short term interest rates are affected by the Fed’s rate policy and “quantitative easing” affects the longer term interest rates.  In particular, “quantitative easing” is aimed at the 10 year rates which effectively set mortgage rates. This pressures interest rates down across the board, and messes with the normal bond market’s ability to set interest rates.

This is an area of uncharted waters for the US dollar because it is basically the monetization of US Debt.  Add this to the pressure on the US dollar caused by the $8 trillion plus in bailouts in the last year and a half since August 07, and we face a situation where the dollar may collapse and plunge towards new lows with startling quickness.

I for one say let’s hope that this does not happen.  A dollar collapse does not bode well for anyone even if it propels gold to the moon.  What good does it do you to have purchasing power if the world is in chaos and there is nothing to purchase? An orderly move down in the price of the dollar is the desired result of these ham handed monetary policies.

Can The Dollar “Get A Little Help From Its Friends?”

There are indications that the dollar may get some help from it’s neighbors.  It has been said that when the US gets the sniffles, the world catches a cold.  That appears to be the case with this recession/depression.  With the US at 0% interest rates the rest of the world’s banks have no where to go but to follow the US’s lead. This should take some of the pressure off the dollar and keep it form going into a free fall.

Dec. 17 (Bloomberg) — The Bank of Japan may this week follow the Federal Reserve deeper into the zero interest-rate world, beating European counterparts to the punch and forcing it to mull unorthodox methods to revive its economy.

Investors see a 54 percent chance that the Bank of Japan’s policy board will reduce its overnight call rate from 0.3 percent at this week’s meeting after the Fed yesterday pared its key rate to as low as zero. That would leave it to pursue unconventional ways to boost economic growth such as by buying corporate bonds to reduce market borrowing rates.

The Bank of Japan will want, and has to be seen, to match the Fed in its response to the sharp economic slowdown, said Julian Jessop, chief international economist at Capital Economics Ltd. in London.

The use of so-called quantitative measures to lower borrowing costs in the U.S. and Japan may emerge as a global theme in 2009 should the recession and the ongoing credit crunch oblige central banks in Europe to cut interest rates.

Central banks everywhere are going to be pushing rates closer to zero and thinking of new ways to kick start their economies, said David Owen, chief economist at Dresdner Kleinwort in London. The financial crisis is still going and recessions are getting worse

That article also notes that the Bank of England and Swiss National Bank are also talking about the use of”quantitative easing” to jump start their ecomomies.  Where there is smoke, there is usually fire. The European Central Bank (ECB) is resisting further cuts and not entertaining “quantitative easing” measures at this time.  The ECB has a huge problem, born of the committee format of their currency.  What countries bonds do you buy and in what percentage.  Do you base it on GDP or what?  How ever that discussion were to turn out you can rest assured that Germany would not be happy with any result.  When push comes to shove the ECB will follow the rest of the world, but probably two years later.

The world’s Central Banks really have no other choice but to follow the US as the global downturn gains steam in their economies.  This concerted effort will solidify and propel the Central Banks towards the use of gold as a means to restore confidence in their inflated and little trusted currencies.  As the dust begins to settle on this incredible financial mess brought on us by the Central Banks, more and more of them will be led kicking and screaming to have partially gold backed currencies.  Quality will then be easily distinguishable by the percentage of gold’s backing of the currency.  Of course, it goes without saying, that there will be a lot of ups and downs before we get from here to there.

Steel production represents growth.  This chart indicates a steep deceleration in growth.  China’s economic future is rapidly deteriorating as manufacturing falls off, tens of millions of layoffs are on the horizon for 2009.  Just this Dec. 15th the IMF cut it’s forecast for growth in China by half, down to 5% from 10%.  Add to this record back to back declines in consumer prices and these reports show a global economy teetering on the brink of the deepest recession/depression since the Great Depression of the 1930′s.

Gold will be the beneficiary of the path on which we are now headed.  The road will not always lead up, but in the end we will arrive at a level which will force us to look back on these levels with the Hubbel Telescope to put the move in perspective.  Make no mistake, the world’s Central Banks will do everything in their power to keep the game afloat.  Their attempts at saving their fiat currencies will trigger some wild gyrations in the price of gold, both to the upside and the down side.  It is up to the trader to know his, or her, game plan and to not be panicked out of positions at the wrong time. There will be ample opportunities ahead to both buy and sell.

As a general rule, I would not be selling any physical metals for quite some time.  This is the acquisition phase for the physical metals.  My buy an sell comments refer strictly to the metals stocks.  In the stock arena there are no profits or losses until you pull the trigger.  Enough said.

So with that thought in mind let’s see what the markets are up to at this time.  The DOW is currently up 17 at 8,841, the NAS up 8.50 at 1588 and gold is down $12.05 at $853.20.  This looks like profit taking after the latest run up in gold and a bounce away from the resistance point in the $870 area.  As the market gets nearer to closing we will get a more accurate  picture of what is happening with the price of gold.

Till next time, good luck and good trading!

Also Noteworthy:

• A Crack In The Dam
• Quantitative Easing To Infinity And Beyond!
• Gold as Currency
• The Gold Jewelery Downturn
• Gold In Flux And The China Syndrome

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