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« Agnico-Eagle Mines Call Options Up 89% in 2 Days! | Main | Options Trading: Charts »
Tuesday
Oct072008

Bernanke is turning Japanese!

USD Chart 08oct08


The benchmark interest rate in the United States could be lowered from its current level of 2% as Ben Bernanke told members of the National Association for Business Economics, as soon as the next Board of Governors meet on the 28th and 29th October 2008. In doing so Ben will be following the policy that the Japanese instigated some years ago when they lowered the rate all the way to 0%.

For those investors who are currently dumping stocks and moving into cash a rate reduction means that the return on their deposits is way under the rate of inflation and is therefore a deteriorating investment. Once the penny drops they will be keen to move into an asset that is actually going up and the obvious answer to us is that GOLD will be one of the beneficiaries. However we are gold bugs so please take our comments with a pinch of salt.

The US Dollar currently sits at ‘81’ on the USD Index chart as shown above and a rate reduction could just be the act that caps any further strengthening of the dollar. This would also attract a bout of profit taking and usher in another slide in the dollars value. The knock on effect would be to push gold through the $900/oz level on its way to the $1000/oz level.

The DOW lost another 500 points yesterday, as we can see from the chart below the DOW is suffering dramatically and Ben may just be tempted to make a change before the next scheduled meeting and lower rates in an attempt to prop up the market, or at least slow the rate of decline.

DOW Chart 08oct08

To quote Ben Bernanke:

“Over all, the combination of the incoming data and recent financial developments suggests that the outlook for economic growth has worsened and that the downside risks to growth have increased,”

This is most certainly knife-edge stuff so to read more on this speech click here to read a report by The New York Times.

Got any comments? Then fire them in!

Trading decisions belong entirely to you as your circumstances are different from ours and we trade to suit our investment criteria and cash position

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Reader Comments (10)

The rate cuts today suggest that central banks aren't worried about inflation - that deflation is now upon us. Falling prices in soft commodities, base metals, oil all indicate that price inflation is softening, if not disappearing.

If gold is a "hedge" against inflation, then one would expect gold to fall from here. However it seems the flight-to-quality panic is the driver on gold prices at present.

Remember the Japanese had deflation - and in that environment the gold price suffered. Any thoughts on this?

October 8, 2008 | Unregistered Commenterdasv

When you recommend GOLD, as being self-made 'gold bugs', you must be referring to actual gold bullion and coins, aren't you?
Because due to money contraction and depression-like market behaviour we are experiencing nowadays, you cannot be serious of recommending gold miner stocks in the short term, are you?
Longer term is valid.

October 8, 2008 | Unregistered Commenterde Graaf

First of all, thank you for your newsletter...I always look forward to receiving it...the information is of great value to me personally.

I have just one comment with regards to the whole political/financial melodrama that is "now showing" in the national media...this is from Shakespeare..
"...a tale told by an idiot(s), full of sound and fury, signifying nothing."

It appears that the Great American Eagle(ego?) has now entered into its self-destruct phase...but hope springs eternal, and out of the ashes the great Phoenix may well re-appear and once again find itself imprinted on the Great Seal as well as a new gold backed currency.

Regards,

Larry Lynch

October 8, 2008 | Unregistered CommenterLarry Lynch

Graff got a point. Miners is a somehow risky bet, because miners are companies (not only gold holders) and suffer the same credit crunch problems to finance operations (like everybody).

Nowadays, I would see gold as a safe investment because the fear of financial sistemic disruption but not as an inflation hedge. Maybe inflation wont be a problem in the coming months, and even considering the money oversupply approved by centralbanks around the world (and the bailout plan), we shouldnt miss the point today: 2 storms collide. 1.- Serious sistemic financial problems not solved yet AND 2.- a begining of a deep and serious recessionary cicle.

It seems that the first development push-up gold prices heavily (but are short-lived, maybe a couple of quarters as much), the second trend pull down gold prices (because deflationary pressures).

I´m about to discard miners from my portfolio and to determine whether gold funds like GLD are a good idea to stay long -until the financial mess ended.

PS: Gold (real gold, like 1 oz. Golden Eagles in my hand) to me is a sure bet for terms longer that a decade, but this is not the issue in discussion today.

Regards,

October 8, 2008 | Unregistered CommenterThe Devil

to the devil ::: youre wrong -the devil is the greatest deceiver who ever was ! if it wasnt for this financial mess cause nobody in the govt was watching our money responsibly -gold/silver stocks would be taking off hard right now-but cause of the financial mess it was slowed down just temporarily....case in point devil 10/8/08 agnico eagle up 12% today,yamana up 18 % today,randgold up 22 % today,kinross up 18 % today ,,,hecla up 19% today,pan-american silver up 3.98% silver wheaton up 8.71 % silver standard up 10.53% all today !!!!!!!!!!!!!!!!!!!!!!!! sell in may come back after labor day ----devil man you need an education ! when it starts getting cold out side here in the usa thats when these gold and silvers start taking off---by the way the devil if listened to will only lead to humanitys downfall..listen to logic and follow the trend..the trend is your friend ...the devil never was or will be!!!!!!!!!!!!!!!

October 8, 2008 | Unregistered Commenterlou

Boy you got the stress fully invested I reckon by your response. Take it easy Lou, everybody has its visions.

True, the miners are up for a correction today and maybe they just break out some more as Gold moves up.
Don't forget that we are experiencing a worldwide recession/depression the coming year(s). The signs are clear. The bounce is in favor of gold stocks momentarily, but in 2009 the commodities boom is offf...
Gold bullion and coins are the retreat / safe havens today.

October 8, 2008 | Unregistered Commenterde Graaf

To add to above;
For the short term the miners are good. Its the Safe Haven effect. People got to put their money somewhere when indexex are down tremendously nowadays.

October 8, 2008 | Unregistered Commenterde Graaf

by the way ive looked at all the stocks under basic materials gold and silver covered in my scottrade site --there was WAY MORE green {positive percentage move } UP than RED{negative percentage}down today ! looks like gold and silver may be starting to take off again !

October 8, 2008 | Unregistered Commenterlou

Lou,

Poor friend, how much are you losing because your gold mining stock fanatism?

You miss the obvious: for example, KGC YTD chart is way down; probabilities are on the bear side.

In order to avoid a rash of insults, may I suggets you to stay in cash until you digest the losses and cold your head.
Trial and error method is very costly in retail trading.

Don´t tell I warn you.

October 16, 2008 | Unregistered CommenterThe Devil

Lou, consider using a 25 percent trailing stop. You can limit your losses this way.

Long term buying is always a good option, but make sure you do it at the low(est) levels.
The expectations are not very good. But miners may rally a bit during the beginning of 2009.

October 16, 2008 | Unregistered Commenterde Graaf

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