U.S. Inflationary Interest Rate Cut Bullish for Gold

By: Mark_OByrne

Gold rose nearly 2% yesterday as the Federal Reserve decreased the fed funds rate by 50 basis points to 1.00%. Other central banks internationally are also slashing interest rates and there is increasing speculation that the Bank of England and the ECB may cut interest rates aggressively as early as this week and possibly even today in an effort to prevent international financial contagion causing a sharp global recession.

Silver surged 12% yesterday from extremely oversold levels – its largest jump since December 31 st 1979.

The dollar fell sharply yesterday and increasing speculation that the Federal Reserve may decrease interest rates to  0% will likely put much pressure on the overbought dollar in the coming weeks. Negative real interest rates and further cheap money policies and unprecedented digital money creation will likely be very inflationary in the coming months and have significant implications for the US dollar and the international monetary system.

Today should see confirmation that US GDP contracted as consumers nervous about the economy and a sagging stock market pare spending. Analysts, on average, expect GDP -- the measure of all goods and services produced within the U.S. -- to decline at a 0.5 percent annualized rate for the third quarter, according to Thomson Reuters.

Central Banks Slash Interest Rates to Prevent Deflationary Crash - Risk Weimar Inflation
A recession is now inevitable in the US and the question now is as to how severe the recession is and whether it leads to a Depression in the US and a global recession. The risks of an international monetary crisis are increasing by the day and with Bernanke's helicopters showering dollars on the international financial system in an effort to prevent a systemic deflationary crash and depression there is the increasing possibility of a Weimar style hyperinflation developing.

There is a titanic battle between the Scylla of a deflationary crash and the Charybdis of a Weimar hyperinflation or a particularly nasty bout of global stagflation that would make the stagflation experienced by western nations in the 1970's look benign in comparison.

Scylla and Charybdis are two sea monsters of Greek mythology who were situated on opposite sides of the narrow strait between Italy and Siciliy. The sea monsters were located in close enough proximity to each other that they posed an inescapable threat to passing sailors; avoiding Charybdis meant passing too closely to Scylla and vice versa.

By Mark O'Byrne, Executive Director

Gold and Silver Investments Ltd. have been awarded the MoneyMate and Investor Magazine Financial Analyst of 2006.

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