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Gold Awaits the Fed

December 16, 2008 Inflation, Politics, Predictions 1 Comment

Here we are at another Tuesday waiting for the Fed to lower interest rates by 50 basis points to .05%. The 50 basis point drop has already been factored in by the markets so anything less will be a shock to the markets and anything more would be a surprise. It is interesting to note that the markets have already made their pronouncement on the Fed’s proposed move. so it makes you wonder whether the Fed is ahead of the curve, or just following the other lemmings toward the cliff? Be that as it may, the Fed has just about emptied it’s interest rate arsenal.

Gold is virtually unchanged, down .01% at $835.90 in electronic trading before the markets open. Gold is coiling to move up once the 50 basis points drop is announced later today. Once again we are seeing a different approach by gold to this Fed meeting. Usually profit taking kicks in sending gold down before the rate is announced, but not this time. It appears that gold has also factored in this rate cut and has decided that this move is going to give the dollar another push on it’s way down hill.

Gold Bets On Bernanke’s Decision

Where Do I Go From Here?

It appears that gold has already discounted Bernanke’s coming rate cut and is looking towards future inflation. Let’s take a look at what Pratima Desai in London(Reuters) wrote this morning.

Gold could once again surge above $1,000 an ounce as the dollar plummets and investors seek alternatives to stocks, bonds and bank deposits as well as protection from inflation.

The buzzword at the moment is deflation. But fund managers are convinced this will be short-lived and followed by a period of inflation that will erode the value of paper assets.

Spot gold hit a record $1,030.80 an ounce on March 17. It fell below $700 in late October, partly because investors sold their holdings to cover losses in equity and bond markets hit by the credit crisis. It is now around $830 an ounce.

The trigger for a break higher is likely to come from a much weaker dollar, making gold cheaper for holders of other currencies, as markets price in vast amounts of U.S. government borrowing to shore up the economy.

“The U.S. will have a debt crisis next year alongside a currency crisis. The dollar is on the verge of taking a complete dive,” said David Murrin, chief investment officer at Emergent Asset Management.

Two key points are addressed in this article. “Deflation” if it occurs will be short lived and rapidly turn into inflation spurring strong moves in gold and gold stocks and the US will have a debt crisis next year. Of that I have no doubt. The printing presses have been running overtime and it appears that the new administration is intending to throw them into hyper-drive. This action will launch gold on a powerful upward leg.

All of the signs are pointing in one direction for gold and that is up. The only part of the equation that we don’t know is the when of the time line. How long will it take for all this liquidity to filter through the economy and start the inflation rolling? I can’t answer that and I doubt if anyone else can either. Timing is pure speculation. I am sure that the Fed and the government, being two separate and unrelated entities, will do everything in their power to try to conceal and control the inflation numbers as long as they can. That means that by the time the public has any real notion of how bad it really is it will already be out of control.

Normally I would say that gold would be the “canary in the coal mine” alerting us to the rising inflation, but here again, the powers that be will do everything in their power to reduce gold’s cry of alarm. On the bright side, the longer gold is artificially held down, the higher the bounce to the upside. Barring any catalyst events, I feel that gold will take out $1000.00 per ounce permanently in 2009. Judging by what is going on now, it may be way earlier in ’09 rather than at the end of ’09.

24 hr Gold 12-16-08

Until the Fed announces, things should remain relatively quiet, so let’s take a quick snapshot of the markets before signing off. The DOW is trumpeting the rate cut by moving up 90 at 8655 while the NAS is up 24 at 1,533. Gold is treading water down $0.37 at $836.16. We will take a look at he fallout from the Fed’s decision tomorrow.