Close to zero Fed interest rates mark a new stage in the evolution of the US financial crisis, and the accompanying statement suggested that we may have rates at this level for a long period like Japan in the 90s.
Even the most cursory glance at the US dollar chart shows a double-top and the dollar rally now looks to be definitely over. Given the inverse relationship with the gold price we can equally be sure that the yellow metal will shortly test is March highs again.
Silver up too
Silver has also bounced on the Fed rate cut but generally lags behind advances in the gold price, only to sprint up with out performance later in the rally.
After the nasty dollar rally this summer which decimated many precious metal portfolios this is a welcome respite for investors in this asset class. My prediction of a Gold:Dow ratio of one in 2009 looks a step closer to fulfillment.
It is clear that the US is going to use dollar devaluation as a key part of its recovery strategy, as bond holders ought to realize. At some point there will be a big rotation out of dollar assets and into a currency without government control like gold which can not be printed.
Zero coupon
Certainly there is little point is holding cash or bonds for their ability to earn income which gold can not. Investors could choose to buy equities instead but the economic outlook for 2009-10 is truly awful and price-to-earnings ratios are only a useful guide to share valuations if companies actually continue to make profits.
However, share prices may advance on a more inflationary outlook as bailouts and stimulus packages emerge, and in that case precious metal stocks are going to be the best ones to own, particularly the explorers.
Anybody checking their precious metal stocks today can see how they leveraged the gold price advance on the rate cut last night. This will continue to be the case.
-- Posted Wednesday, 17 December 2008 | Digg This Article | Source: GoldSeek.com
Previous Articles by Peter Cooper
About Peter Cooper:
Oxford University educated financial journalist Peter Cooper found himself made redundant by Emap plc in London in the mid-1990s and decided to rebuild his career in Dubai as launch editor of the pioneering magazine Gulf Business. He returned briefly to London in 1999 to complete his first book, a history of the Bovis construction group.
Then in 2000 he went back to Dubai to become an Internet entrepreneur, just as the dot-com market crashed. But he stumbled across the opportunity to become a partner in www.ameinfo.com, which later became the Middle East's leading English language business news website.
Over the course of the next seven years he had a ringside seat as editor-in-chief writing about the remarkable transformation of Dubai into a global business and financial hub city. At the same time www.ameinfo.com prospered and was sold in 2006 to Emap plc for $27 million, completing the career circle back to where it began a decade earlier.
He remains a lively commentator and columnist as a freelance journalist based in Dubai and travels extensively each summer with his wife Svetlana. His financial blog www.arabianmoney.net is attracting increasing attention with its focus on investment in gold and silver as a means of prospering during a time of great consumer price inflation and asset price deflation.
