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« Gold and Gold Stocks: Take Some Profits | Main | Gold: Turbo Driven Spikes! »
Wednesday
Jan302008

Half Point Fed Fire Cracker Fizzles Out!

The Federal Reserves latest rate cut and some timely buying sent the DOW up 200 points initially, however this jump soon fizzled out as the DOW returned to negative territory by the end of the day. Gold had its moment in the sun too! It also jumped to around $940/oz, however as the Sydney and Hong Kong stock exchanges open we see that gold has drifted back to trade at around $924/oz.

We have said for a long time that we thought the rate cuts by the Federal Reserve only provide short term relief for the market, whereas longer term cutting rates will actually have a negative affect as it adds to inflation. However it appears that this short term relief is getting shorter with every rate cut. We watched the markets rocket upwards after the Fed announcement but fizzle out by the end of the day, and that was with a cut of half a point!

Bernanke has taken 1.25% off the base rate in less that two weeks and the result? The DOW has risen 343.53 points or 2.84%
. There is a lesson to be learned here. When it takes a rate cuts of 1.25% in two weeks to move a stock prices up a measly 2.84%, there is something very unhealthy about the level the stocks are trading at. In fact, if this is the way things are going, we will need to see rate cuts totalling 6.5% to force the DOW to make a new high. That would leave the base rate at -3.5%, in other words paying people 3.5% to borrow. It is not yet known how far Bernanke will go with his rate cuts, but it is unlikely they will go below zero! With that in mind we think it is equally unlikely that the DOW makes a new all time high anytime soon.

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