Gold, Oil & Euros Pushed Higher by Fed's Interest Rate Cut; "US in Deep Trouble"

By: Adrian_Ash

GOLD PRICES pulled back $2 per ounce in London on Wednesday morning to trade just shy of the new 16-month high hit when the US Federal Reserve slashed Dollar interest rates on Tuesday in a bid to "forestall" recession.

"You can throw away your charts in these kind of market conditions," said one bullion dealer in Singapore to Reuters. "There's a chance we will see a new high this week.

"It was an aggressive move by the Fed to cut rates by 50 basis points," he added. "I think the US is in deep trouble.

"Gold should be your safe haven."

Gold futures for Dec. delivery also slipped back after leaping to a 27-year high on the Fed's decision. According to Bloomberg data, Tuesday's top of $735.50 was the highest price for the most-active gold futures contract since 11th Feb. 1980 .

"Technically, gold looks set to test last year's $730 high in the short term," said Brandon Lloyd for Mitsui in Sydney this morning, "but it will potentially need to weather profit-taking following [Tuesday's] spike."

Crude oil, wheat and base metal prices all rose following the Fed's announcement, with the European single currency hitting new record highs against the ailing Dollar at $1.3981. US light crude prices rose above $82 per barrel for the first time.

The British Pound, by contrast, gave back much of its Fed-driven spike during early trade today, dropping back below $2.00 and helping the Sterling Price of Gold recover above £361 per ounce.

The London stock market rose by 2.3% and banking stocks jumped by more than 4%. But shares in Northern Rock – the aggressive mortgage lender that suffered a run by depositors until the UK government guaranteed their savings on Monday night – dropped another 7% to a fresh ten-year low.

For German and French investors looking to Buy Gold Today , the metal began the day in Frankfurt trading €1 either side of €518 per ounce. Like the Bank of England in London , the European Central Bank refused to cut its interest rates earlier this month. Short-term loans from the ECB to the European money markets, however, have jumped this week to €155 billion ($217bn).

"This is not a subprime crisis," says Christopher Wood, chief strategist at CLSA. "Subprime has merely exposed the bigger scam of structured finance; a scam about pretending that bad credit is good credit."

Wood sees the Gold Price rising four-fold in the next three years to hit $3,400 per ounce.

"There's a strong possibility gold will reach $740 or $750 at the end of this month," reckoned one Tokyo gold trader today after Japan 's most-active gold futures contract rose more than 2.1% for the session.

The Nikkei stock-market index put on 3.7% by the close, while European equity markets rose 1.9% in Frankfurt by lunchtime, and added more than 2.4% in both Paris and Madrid .

Short-term bond prices also continued to rise, but 10-year US Treasury debt was sold lower for the third session running, pushing yields higher.

Longer-dated bonds are more sensitive to fears of inflation. A ten-year bond held to maturity would be destroyed if the value of the currency underpinning it continued to slide.

That's why "we see US bond yields rising," says Yoshio Takahashi, a Tokyo strategist for Barclays Capital. "Market turmoil will calm down [but] the inflation risk will increase because of the big rate cut."

The difference between short-dated and 10-year bond yields has now widening to a 7-week gap – "a classic steepening of the yield," notes Gerard Baker in today's London Times . "It may presage concerns about inflation risks – fuelled by concern that the Fed has dropped the inflationary ball."

Simply put, "the rate cut is inflationary," says Ron Goodis, futures director at Equidex Brokerage in Closter , New Jersey , "and money is flowing into gold as a hedge."

By Adrian Ash
BullionVault.com

Gold price chart, no delay | Free Report: 5 Myths of the Gold Market
City correspondent for The Daily Reckoning in London and a regular contributor to MoneyWeek magazine, Adrian Ash is the editor of Gold News and head of research at www.BullionVault.com , giving you direct access to investment gold, vaulted in Zurich , on $3 spreads and 0.8% dealing fees.

(c) BullionVault 2007

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