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Gold Surges on the Fed 50 Basis Point Interest Rate Cut

Commodities / Gold & Silver Sep 19, 2007 - 10:00 AM GMT

By: Gold_Investments

Commodities Gold
Spot gold was trading at $723.70/724.20 an ounce as of 1200 GMT. As expected gold surged on the Federal Reserve's quite drastic 50 basis point interest rate cut and 50 basis points discount rate cut. On the decision, spot gold in electronic after hours trading immediately rallied from $715 to $726.90. Subsequently it has traded sideways to slightly down in Asian and European trading.


As predicted, international markets have rallied but any bounce in equity markets will likely be another dead cat bounce.

The 50 basis point drop in both the Federal funds rate and the discount rate shows that the Federal Reserve is very concerned that the already serious U.S. housing downturn is likely to intensify in the final quarter of 2007 and into 2008. This is especially the case as there is a massive, more than $1 trillion (€715 Billion), of adjustable rate mortgages to reset in the coming months.

It is believed that about 35 percent of U.S. mortgages have some kind of variable rate — from those that have already reset to those whose rates won't move for another decade. Roughly $1.1 trillion (€810 Billion) in adjustable rate mortgages were originated in the U.S. in 2005 and 2006, while another $779.13 billion (€570.46 Billion) of interest-only adjustable rate mortgages were issued in that period, according to a survey from the Mortgage Bankers Association.

Mortgage-backed securities represented only 5 percent of mortgages balances in the U.K. as of 2003, versus 65 percent of mortgages outstanding in the U.S. in 2006, according to a paper by the New York Federal Reserve. This will likely create further solvency issues for hedge funds, exotic conduits and some large financial institutions.

When these mortgages reset to higher rates, it will likely make the 'subprime crisis' look like the early warning signs that it most surely is.

Forex and Gold
The USD hit a new all time low against the euro but has not breached the $1.40 yet. High yielding currencies, such as the AUD and NZD, were again in favour.

The dollar has fallen to a new all time low mark on the U.S. Dollar Index at 79.091. The notion that the U.S. dollar or U.S. treasuries or bonds are safe haven currencies or assets is likely to be seen as very erroneous in the coming months. Lowering interest rates will make the United States less attractive for overseas capital.

George Soros's investment partner, investment guru Jim Rogers told Bloomberg News that under Chairman Ben Bernanke, the Fed is helping Wall Street at the expense of everybody else. "If Bernanke starts running those printing presses even faster than he's doing already, yes we are going to have a serious recession," Rogers said. "The dollar's going to collapse. The bond market's going to collapse. There's going to be a lot of problems in the U.S."

Rogers, Faber, Volker, Greenspan and even Bernanke's own warnings were underlined by the breaking news that foreign investors' appetite for U.S. assets did indeed decline in July before the recent debacle even began. Foreign buying of U.S. financial assets slowed in July to the weakest pace in seven months, as a rout in the subprime mortgage market tempered international demand for American bonds. Total holdings of long-term equities, notes and bonds rose a net $19.2 billion, down from a revised $97.3 billion in June, the Treasury Department said Tuesday. International investors sold the largest amount of Treasuries in at least four years and slashed purchases of mortgage-backed agency debt by 78 percent. Demand for stocks also declined amid concern that losses in the subprime housing market will hurt economic growth.

Once again short term thinking and the short term interests of Wall Street have taken precedence over the long term health of the U.S. economy, U.S. dollar and the global monetary system.

Ben 'Helicopter' Bernanke has now shown his true credentials as a monetarist dove and an inflationist like his loose money predecessor Alan Greenspan and unlike the prudent Paul Volker. The notion that the huge imbalances created by irresponsibly cheap credit and massive increase in money printing and the money supply in recent years can be corrected by further cheap credit is foolish nonsense.

Bernanke's dangerous statement that we have printing presses and helicopters to drop money in order to prevent deflation was seen as ominous by many at the time and is looking increasingly so.
"The U.S. government has a technology called a printing press that allows it to produce as many U.S. dollars as it wished at essentially no cost," he said, adding with flourish that the bank could even drop bank notes from helicopters.

It looks increasingly like the USD may be sacrificed and inflated massively or debased in order to help pay off the U.S. huge and unprecedented deficits and household and government debt levels. The USD fell to new record lows against most major currencies and gold on the reduction. In a bid to stave of a significant recession and deflation Bernanke may have increased the likelihood of a more serious stagflationary or hyperinflationary depression in the U.S. in the coming years. Unless Bernake does a u-turn and increases again in the coming months which is highly unlikely, this could ultimately lead to the USD losing its status as the reserve currency of the world.

Silver
Spot silver is trading at $12.98/12.30 (1200 GMT) an ounce and also rallied on Bernanke's reductions.

All of the fundamental reasons for silver's rally in recent years remain in place, and silver, while technically damaged from the recent sharp sell off remains historically undervalued and will likely catch up with gold in the coming months and also reach new multi year highs above $15.
Silver – Probably the most undervalued Asset Class - http://www.gold.ie/Articles_of_Interest/AOI_08-05-07_Why_the_Silver_Price_Is_Set_to_Soar.htm

PGMs
Platinum was trading at $1304/1308 (1215 GMT).
Spot palladium was trading at $330/336 an ounce (1215 GMT).

Oil
Oil rose above $83 overnight with fears that global demand is continuing to outpace global supplies.
Bernanke's interest rate reductions are highly inflationary and oil producers seeing their dollar revenues continuingly depreciating are likely to seek higher USD prices.

Gold Investments
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