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« Kinross Gold Call Options Up 77.45% in Two Weeks! | Main | Portfolio Update 22 June 2008 »

US Rates: No change!

USD Chart 26 June 2008

Ben Bernanke and the Federal Reserve voted 9-1 to keep the federal fund rate at 2%; wedged between a rock and a hard place they had little choice.

To raise rates would have dealt a body blow to the American economy and increased the pressure on homeowners causing much hardship. The real estate sector is imploding in many parts of America and to increase rates at this time would have accelerated already tumbling house prices to much lower levels placing many owners in negative equity. The rapid rise is real estate prices has prompted many homeowners to increase their loans in order to purchase other things. The resulting outcome is that those homeowners now owe more than the house is worth and many will conclude that walking away is the best option.

To lower rates would have added a sweetener to the predicaments mentioned above however on the horizon and picking up speed is that dreadful dragon known as inflation. The inflation figures are rising globally we only need to conduct some random sampling of our surroundings to see that food, power, petrol, etc have jumped in price. The official figures may be three or four percent but in reality they could be in the ten to twelve percent range. The last time we experienced this was in the ‘70’s when the interest rates were ratcheted up in order to slay the dragon. During that period it was possible to earn around eighteen percent on your savings, if you had any!

Ben Bernanke knows full well the mess that the banks are in and is trying to extend a lifeline to them. But the longer we leave inflation to gather pace the harder it will be to contain it when we recognise it as the new enemy to prosperity.

The Federal Reserve are talking tuff on inflation, it’s the only thing they can do. However talk, rhetoric and jawboning will not provide the US dollar with the crutches that it needs. The dollar is now and has been for some time the sacrificial lamb. As we can see from the above chart the dollar has experienced progressive slippage for the last two years. It has been unable to rise above its 200dma despite putting in a feeble rally recently. As the demise continues more and more people will realise that storing their wealth in a depreciating asset that offers a rate of return substantially lower than the rate of inflation is futile.

So just what does this mean to gold bugs you ask? Well the flight to safety will gather speed and some will realise that gold offers the safety that they are seeking. Gold has outperformed paper currencies and the mainstream stock markets indices for a number of years now and this point will not go un-noticed for much longer. Those of us who around for the last gold bull market will remember that even when the interest rates started to rise it did not affect gold’s progress, both the dollar and gold headed north together until the final blow-off.

In the northern hemisphere summer has arrived and our attention turns to such niceties as the tennis at Wimbledon, the European football competition which is in full swing, the start of the American Football season and summer vacations, all a welcome relief from the dire straits that surround us. By all means enjoy these events to the full but try and put to one side a couple of hours per week to evaluate your own position and implement the necessary changes in preparation for what will be an extremely tough time ahead. This period should be used for the acquisition of both gold and silver and their associated stocks in our humble opinion. Target a few of your favourite quality precious metals producers, set your buying price, submit your orders and wait for them to be filled. This market will be volatile in the short-term with the dips forcing some investors to capitulate. Try to hold on in there as we anticipate a massive rally from September through to February 2009. We will endeavour to trail our investment moves beforehand and we will also publish every trade we make so you can see exactly what we are buying, when we are buying and why. Our gold and silver newsletters are free so please sign up in order not to miss out on what will be an explosive second half of the year.

Good luck with your bargain hunting.

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