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.
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.
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