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« Silver Futures Spread Bet brings 100% profit | Main | Northern Rock Plc: As safe as houses? »
Tuesday
Sep182007

Gold: Is the rate cut built in?

The consensus appears to be that the Federal Reserve will announce a rate cut at today’s meeting of the FOMC. As gold bugs we expect this action to be negative for the US Dollar and therefore positive for gold, or is it?

So we are all at our desks this morning talking up gold and allowing ourselves the luxury of predicting the spot price, gold futures, silver futures and even the what the close will be for your favourite stock come the end of the week.



Well for a moment lets dwell on the old adage of the ‘Buy the rumour and sell the news’ We have the rumour now, we are looking for a rate reduction of 25 basis points, some say it could be 50 points.

The following are possible scenarios for gold:

If we get no change it will be negative for gold.
If we get 25 basis points, well its expected.
If we get 50 basis points, we will see a positive effect on gold.

If we take a look at the US Dollar we can see that a slight recovery has already started despite the expectation of a rate cut. Note that the US Dollar has turned up and that the technical indicators have been on the floor in the sell zone but are showing signs of recovery.

US Dollar Chart 18sep07

Taking a look at the gold we can see that gold has gained around $50/oz since Labor Day and almost $80/oz since July. Gold has burst into life but the technical indicators are already at the top of their respective ranges.

Gold Chart 18sep07

No-one knows the future but we suspect that the news of a 25 point reduction is already built in and that will lead to profit taking on gold possibly taking prices down to test $700/oz. As we write gold is trading at $717/oz on the London Stock Exchange. We do not expect gold to do very much today as traders wait for the outcome of today’s meeting.

So if you are a trader looking to short gold, today could be the day for you. This is not something that we will be putting in place as our invest account is focused mainly on Canadian gold and silver stocks. The charts for gold stocks are in better shape than the metal so we will ride it out and continue to look for buying opportunities.

Be warned though, going short in a Bull Market is a dangerous strategy. You will need to be on your toes and able to move quickly so it’s not for the faint hearted. We will watch the action and allow it to settle before re-assessing the situation.

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Reader Comments (3)

I am curious if and when stock prices of gold companies will start to share the rally. Right now gold stocks do not seem to be doing much. What are your thoughts?

September 19, 2007 | Unregistered CommenterLarry

The HUI is at 400 so that's a start but we do share your concern. The stocks could be telling us that gold is over bought and about to come back. We do try and warn our readers that snap backs do happen just when you are expecting something positive. So go gently and be prepared for a snap back then it wont hurt so much. (Hopefuly)

September 22, 2007 | Unregistered CommenterGold Prices

What is the HUI where do you see it?

September 22, 2007 | Unregistered CommenterLarry

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