Panic at the Fed Makes $1,000 Gold Seem Imminent
What this means is that the Fed will now be thought of as concerned with intervening in the dynamics of the equity markets as well as the more sedate world of economic statistics. This could be seen as the way forward; a proactive move that reflects the increasing importance of equity markets to the functioning of the economy. This importance is twofold: Trouble in the equity markets affects the ability of companies to raise money for investment and makes the ordinary investor more cautious about opening his wallet on Main Street as he loses his money on Wall Street. It also seems that price stability - the value of a dollar domestically and exchange rate stability - the value of a dollar abroad, is now most definitely playing second fiddle to the preservation of short term economic growth and/or the mitigation of a recession. This isn't necessarily wrong. But the effect of the Fed's attitude on the dollar is going to be noticeable, further undermining an already embattled currency grappling with a once in a life time - or perhaps even less frequent - adjustment in the balance of global economic power. As the Fed brings interest rates down further, perhaps as soon as next week, money is pumped into the economy, and inflation remains an issue thanks to commodity prices that could remain stubbornly high - there will be a negative effect on the dollar. Not that any action by the Fed could stem the dollar's slide; the reasons for it are too deep seated for that. But the Fed's actions might well accelerate it. At the same time, interest rates are likely to come down across the major economies. Although the European Central Bank continues to try to sound exceedingly hawkish, if the euro zone economy starts looking sickly, the ECB will cut rates, thereby reducing the appeal of the primary alternative to the greenback for those looking to park wealth somewhere liquid... consequently pushing them towards gold. The upshot is that gold now has a chance to entrench itself firmly above $900 an ounce, and if next week's Fed meeting results in another rate cut, then $1,000 an ounce is not out of the question, and in fairly short order. If it doesn't happen then, then it will happen soon. The likely reduced mine supply for this year from South Africa as a result of the crippling power shortages now bringing much of the country's mining industry to a stop provides a supporting factor, but the gold market is about a lot more than mine supply. However, with the deterioration of the dollar unstoppable and now being accelerated by the actions of the Federal Reserve and the oil price likely to stay in strong as a result of runaway demand that could well prove resilient in the face of a global economic slowdown, all the pieces of the golden puzzle seem to be dropping into place. ***
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The Federal Reserve's surprise move to cut U.S. interest rates by 75 basis points last Tuesday seems to signal a sea change in the central bank's outlook. In response to tumbling stock market indices last Monday, the Fed appeared to act in order to try and prevent, or at least moderate, the bloodbath that was bound to take place the next day on Wall Street, which had been closed on Monday for a holiday.