Fed Powerless To Stop Rise in Gold

Fed Shift Indicates Main Rate Will Stay at 2% to Revive Economy
Aug. 6 (Bloomberg) -- Federal Reserve policy makers indicated that interest rates won't budge until next year as they wait for the credit crisis to abate and inflation to ease.

The central bank, which left its benchmark rate at 2 percent yesterday, said ``downside risks to growth remain,'' dropping a reference in June's statement to ``diminished'' dangers. The Fed also said price increases are of ``significant concern.''
http://www.bloomberg.com/apps/news?pid=20601103&sid=aLdR6qgl08_o&refer=us

They're going to have a long wait...

The euphoria on Wall Street then obviously revolves around the Fed standing pat on VERY low interest rates. Ask any economist how we got into the present financial crisis and to a man/woman they will tell you that Greenspan left interest rates too low [1%] for far too long. And so now, here we are stuck down at 2% for at least the next 2-3 quarters.

"Hey, let's fix the problem by recreating what caused the problem in the first place!"

"Brilliant!"

But what about Bumbling Ben's hard line "support" of the US Dollar several weeks ago? LOL! Can you believe people actually believed that hot air? You're damn right downside risks to growth remain, and they are colossal. Diminished dangers to growth, can you say Ben looks like a jackass now? C'mon, it's easy...

"BEN LOOKS LIKE A JACKASS NOW!"

Very good.

Now consider this. The feeble "rally" in the Dollar over the past four months has been recently "sustained" by the belief that the Fed would soon be raising interest rates. Well, now that that is isn't going to be happening, I'd suggest this pathetic Dollar rally is about to hit a wall. The Dollar Index ran into its falling 200 day moving average today. If you've got Dollars you've been wanting to dump, now may be the best opportunity you'll have for a long time.

Then consider this. The weakness in Gold the past four months has been recently "sustained" by the belief that the Fed would soon be raising interest rates. That speculation has now been clearly blown out of the water. It would stand to reason then that with the speculation of the Fed raising interest rates to support the Dollar now destroyed, Gold should be free to resume it's march back to $1000, and on to 'infinity and beyond'.

The Fed clearly has chosen to accept inflation at this time, as their ONLY tool to put up a fight against it is via increased interest rates. Clearly they now understand that raising interest rates at this time is all but impossible, but not necessarily for the reasons you might suspect. Sure, raising rates now would most certainly crush the economy, but let's not forget for even a moment that the Fed has promised to loan money "indefinitely" in a lame effort to give the appearance that the banking industry is "sound". Raising short money rates would definitely increase that plans cost to the beggar banks. The Fed cannot raise rates. Too bad for them, too bad for the Dollar, and too bad for the fight against Inflation. Gold is right where the Big Money wants it...cheap.

Tomorrow it is quite likely that Mr. Trichet will comment on slowing growth in Euroland, but remain steadfast in his vigilant fight against inflation. There should be no doubt that he has NO plans at this time to lower interest rates in Euroland. This should help the Euro regain it's footing and throw pressure back on the Dollar. The Dollar has nowhere to go but down, there is absolutely no fundamental basis that supports a move higher.

To be honest, it is obvious that even the most recent strength in the Dollar is less about economic data here at home being "better than expected", and more about weak economic data in Euroland. Growth may slow in Euroland, and they may be heading for a recession there, but the United States IS in a recession right now. Interest rates adjusted for inflation are NEGATIVE. The reasons to own Gold and Silver are too many to count. I have given you countless reasons to own Gold and Silver over the past four months. They all remain valid.

It is interesting to note that Gold had violent upside moves preceding BOTH the Bear Stearns bailout AND the Fannie/Freddie bailout. Both of these moves higher in Gold and Silver were supported by the fear of an imminent collapse of the financial system. Both moves took Gold into the vicinity of $1000. One just over it, the other just under it. Gold reacted to the potential for economic catastrophe just as it should. I point this out because the Inflation angle that supports moves higher in Gold, and Silver, has so far been fairly insignificant. Yes Gold and Silver have risen since 2001 as the US Dollar has fallen, but the investment class has really failed to jump the train as an Inflation hedge. This "investment" factor is what we are patiently waiting for to launch Gold over the $1000 hump. It's out there, it's lurking, and with Gold now flirting with it's 200 day and 50 week moving averages, savvy investors looking to protect their wealth will begin to trickle out of the woodwork and put a floor under the Gold Market. Couple these investors with the physical buyers in India as fall approaches, and we could soon see that astonishing rise in the Gold price we have so patiently been waiting for.